All CoursesBusiness ValuationApplied Trading Skills
Technical 100Lesson 4 of 1112 min

Context Terms — The Vocabulary Patterns Depend On

These terms aren't candles themselves — they're concepts you need to interpret candles correctly. Students who skip this lesson misread everything that follows.

What you'll learn
  • Define trend and explain why a pattern's meaning depends entirely on the trend it appears in
  • Distinguish between a reversal pattern and a continuation pattern
  • Explain what confirmation means and why a reversal candle alone is only a hint
  • Define a gap and describe the difference between an upside and downside gap
  • Define support and resistance

Context Terms You Need Before Going Further

These terms aren't candles themselves — they're concepts you need to interpret candles correctly.

  • Trend — The prevailing direction of price over the recent past. A pattern's meaning depends entirely on the trend it appears in. The same shape can be bullish, bearish, or meaningless depending on what came before it.
  • Reversal pattern — A candle or group of candles that suggests the current trend may be ending. Reversal patterns require a trend to reverse — they have no meaning in a sideways market.
  • Continuation pattern — A candle or group of candles that suggests the current trend will resume after a brief pause.
  • Confirmation — The next candle (or next few candles) moving in the direction the signal predicted. A reversal candle is only a hint; the next session's action confirms or rejects it.
  • Gap — A space between one candle's range and the next candle's range, where no trading occurred. An upside gap means the next candle's low is above the prior candle's high; a downside gap is the reverse.
  • Support — A price level where buying has historically emerged and stopped declines.
  • Resistance — A price level where selling has historically emerged and stopped advances.

Key Takeaways

  • Trend — the prevailing direction of price. A pattern's meaning depends entirely on the trend it appears in. The same shape can be bullish, bearish, or meaningless depending on what came before it
  • Reversal pattern — suggests the current trend may be ending. Requires a trend to reverse. No meaning in a sideways market
  • Continuation pattern — suggests the current trend will resume after a brief pause
  • Confirmation — the next candle moving in the direction the signal predicted. A reversal candle is only a hint; the next session's action confirms or rejects it
  • Gap — a space between one candle's range and the next where no trading occurred. Support — buying has historically emerged here. Resistance — selling has historically emerged here

Quiz — 3 Questions

Answer one at a time
Question 1 of 30 answered

A bullish reversal pattern forms in the middle of a sideways trading range with no clear prior trend. What is the most accurate interpretation?

AThe pattern is a strong signal — reversal patterns are more reliable in sideways markets because there is no opposing trend
BReversal patterns require a trend to reverse — they have no meaning in a sideways market. This pattern is most likely noise
CThe pattern signals the start of a new uptrend beginning from the sideways range
DThe pattern should be traded but with a tighter stop loss because sideways ranges are unpredictable
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Single-Candle Signals — Hammers, Shooting Stars, and the Location Rule
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Two-Candle Patterns — Engulfing, Piercing, Dark Cloud Cover, and Harami