Technical Analysis and Price Action: Part 2
- Aug 2
- 4 min read
Continuation, Reversal, Candlesticks and Chart Patterns
Once chart structure and key levels are understood, the next step is learning how traders interpret recurring price formations.
This lesson focuses on continuation and reversal behaviour, Japanese candlestick patterns and larger chart patterns.
Part 2: Continuation vs Reversal • Candlestick Patterns • Double Tops/Bottoms • Head & Shoulders • Wedges • Flags • Triangles
1. Continuation vs Reversal
A continuation pattern forms when price pauses or consolidates but the existing trend later resumes.
A reversal pattern suggests that the balance of buying and selling pressure may be changing enough for the prior trend to end or turn.
Context matters. The same-looking formation can behave differently depending on the preceding trend, nearby support and resistance, volatility and whether a breakout is confirmed.
2. Japanese Candlestick Patterns
Candlestick patterns compress information about open, high, low and close into visual formations.
The source lesson groups them into single-, double- and triple-candle patterns.
Single-Candle Patterns
A Hammer typically appears near the lower end of a decline and has a small body with a long lower wick, showing that price traded lower but recovered before the close.
A Shooting Star is the visual opposite and is commonly discussed near the top of a rise.
A Doji forms when the open and close are equal or very close, signalling indecision between buyers and sellers.
The lesson also covers several Doji variations—including standard, dragonfly, gravestone, long-legged and four-price forms. Their shapes differ, but the common theme is uncertainty or a temporary balance between buyers and sellers.
Double-Candle Patterns
Bullish and bearish engulfing patterns use two candles.
In a bullish engulfing setup, a larger bullish candle follows a bearish candle and overtakes its body. The bearish version reverses that relationship.
Tweezer Tops and Bottoms use two candles with similar highs or lows and are discussed as potential reversal formations after an extended move.
Triple-Candle Patterns
Morning Star and Evening Star patterns use three candles.
The first reflects the existing trend, the second has a relatively small body and suggests indecision, and the third provides the potential reversal confirmation by moving strongly against the previous trend.
3. Understanding Chart Patterns
Chart patterns organise a sequence of swing highs and lows into a recognisable structure.
Their purpose is not simply to name a shape. Traders use them to judge whether a trend may continue or reverse and to identify levels where a breakout would confirm or invalidate the idea.
4. Major Reversal Patterns
Double Top and Double Bottom
A Double Top develops after an upward move when price tests a similar high twice and fails to continue higher. The trough between the peaks creates a neckline area.
A Double Bottom is the opposite structure: price tests a similar low twice, suggesting that selling pressure may be weakening.
Head & Shoulders
A Head & Shoulders formation contains three peaks: a left shoulder, a higher head and a right shoulder. A neckline connects the intervening troughs.
The inverse version appears in a declining market with the head as the lowest point.
Traders generally wait for a neckline break rather than assuming the pattern is complete while it is still forming.
Rising and Falling Wedges
A wedge forms when two trend lines converge and the size of price swings contracts.
In the lesson, a Rising Wedge is treated as a potential bearish reversal structure, while a Falling Wedge is treated as a potential bullish reversal structure.
Confirmation is associated with price breaking the relevant boundary.
5. Major Continuation Patterns
Bull and Bear Flags
A flag begins with a strong directional move—the flagpole—followed by a relatively brief consolidation channel.
A Bull Flag looks for an upside continuation after bullish momentum pauses. A Bear Flag looks for downside continuation after bearish momentum pauses.
Triangles
Triangle patterns form as price compresses into a tighter range.
A Symmetrical Triangle has converging highs and lows and does not, by itself, give either side a clear advantage.
An Ascending Triangle combines relatively flat resistance with rising lows, while a Descending Triangle combines relatively flat support with falling highs or falling structure.
Pattern | Structure | Typical interpretation |
Symmetrical Triangle | Lower highs and higher lows | Wait for breakout direction |
Ascending Triangle | Horizontal resistance and rising lows | Potential upside continuation |
Descending Triangle | Horizontal support and falling structure | Potential downside continuation |
6. Confirmation Matters
A pattern is more useful when the market confirms it.
The source repeatedly refers to a break and close beyond support, resistance, a trend line, channel or neckline. This helps distinguish a completed breakout from a temporary intraperiod move.
Pattern first, confirmation second: a recognisable shape alone does not guarantee the next move.
7. Limitations of Price Action
The final slide warns against using price action in isolation.
Technical structures are based on historical price behaviour, while important economic announcements and other fundamental developments can produce moves that ignore previously observed technical levels.
Price action can also oversimplify complex markets, and it may provide insufficient information for longer-term decisions where company fundamentals, economic conditions or industry trends are important.
The practical lesson is to treat patterns as one source of information rather than as certainty.
Key Takeaways
Continuation patterns suggest a pause before the existing trend resumes; reversal patterns suggest a possible change in direction.
Candlestick patterns should be interpreted in context, not as isolated signals.
Chart patterns are built from support, resistance and swing structure.
Break-and-close confirmation is repeatedly emphasised in the source lesson.
Fundamental events can override technical patterns and levels.
Educational Notice: This material is for educational purposes only. It explains general technical-analysis concepts and does not constitute investment advice, a personal recommendation, or a guarantee of future market results. Price patterns can fail, and leveraged trading involves significant risk.
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