Price Pattern trading
It has been noticeable over the years to technical analyst that price patterns are repetitive.
One the first price patterns and price formation we will study is the rectangle formation/pattern.
When the price of the stock falls buyers get excited about buying low and sellers are less excited so they pull out and wait to sell at higher prices. As the price of the stock rise buyers pull out and wait until the price drops but sellers get excited as they can sell to a buying market.
Both buyers and sellers reach a point where there is a lot of disagreement about the price and eventually the price breaks out in the direction of either the buyers (up) or sellers (down). We can then join the highs of the peaks and the lows of the troughs to form a nice rectangle pattern. Let's illustrate this with a real life example.
As you can above the first circle illustrates the rectangle pattern where buyers and sellers are undecided as to where the market is heading. Eventually the buyers win the battle and price broke out the sideways pattern. This is known as accumulation.
The second circle illustrates the reverse where sellers take control. Buyers could not push the price any further. There was too much supply and not enough demand, price eventually broke down from the rectangular pattern. This is known as distribution.
The term consolidation refers to the sideway movement of the stock. This pattern often occur in the futures market and currency markets too.