Chart patterns are one of the most popular forms of subjective analysis. Two of the first technicians to categorize and document the different chart formations were Robert Ed wards and John Magee, Technical Analysis of Stock Trends. An actual examples of some of the patterns traders look for in a market, the breaking of support or resistance levels in these patterns provides an indication that a change in trend may occur. The support and resistance levels are also helpful in providing possible entry and exit points for trading.

The idea behind trading market patterns is to identify formations which have exhibited bullish or bearish behavior in the past. The technician looks for these same formations with current market data for possible trading opportunities. The patterns are generally traded by buying or selling the breakouts which occur above or below the support or resistance points determined from the charts. The following patterns are some of the more commonly found patterns in trading.

The triangle is formed by the resistance line off the two tops and the support line off the two bottoms. Possible buy points include the breaking of the resistance line, or the lower or higher top. Possible sell points include the breaking of the support line, or the higher or lower bottom. If a buy point is reached first, then the original Support line, or the higher or low bottom. If buy points is reached first, then the original sell point can be used as protective stops for a long position. The reverse holds true if a sell level is hit first.

This December 90 S&P500 is an example of a triangle formation. The top of the triangle occurs in early October near the 326 level, and the lower top develops in mid-October near the 321 level. The bottom of the triangle begins in mid-October near the 298 level, and the higher bottom occurs in late October at the 303 level. The market initially breaks through the resistance line in early November at the 317 level, and rallies higher into December. This was a difficult triangle pattern to trade because each time a resistance level was broken the market did not follow through immediately.

A rectangle develops when a resistance line is drawn from two or more similar highs, and a support line is drawn from two or more similar lows. A possible buy point is the breaking of the resistance line. A possible sell point is the breaking of the support line. As with the triangle, if a sell point is reached first, the buy level can become the area to place a protective buy stop, and vice versa.