Trading Chart Patterns

When analyzing charts, you’ll often notice recurring formations. These chart patterns can be valuable tools for entering and exiting trades. Let’s explore some essential patterns you should be familiar with.

• What is a chart pattern?
• 11 trading patterns you should know
• Ascending and descending staircases
• Ascending triangle pattern
• Descending triangle pattern
• Symmetrical triangle pattern
• Flag pattern
• Wedge pattern
• Double top pattern
• Double bottom pattern
• Head and shoulders pattern
• Rounded top or bottom pattern
• Cup and handle pattern

What is a Chart Pattern?

A chart pattern is a specific formation that recurs over time. By understanding past outcomes of these patterns, traders can make educated predictions about future price movements. The effectiveness of each pattern can vary based on market conditions, but generally, patterns fall into three categories:

• Continuation: Indicate that the current trend will continue.
• Reversal: Suggest a change in the trend direction.
• Bilateral: Indicate potential movement in either direction due to volatility.

Let’s examine some of the most common chart patterns in technical analysis.

11 Trading Patterns You Should Know

• Ascending and descending staircases
• Ascending triangle pattern
• Descending triangle pattern
• Symmetrical triangle pattern
• Flag pattern
• Wedge pattern
• Double top pattern
• Double bottom pattern
• Head and shoulders pattern
• Cup and handle pattern
• Rounded top or bottom pattern

1. Ascending and Descending Staircases

• Ascending Staircase: Characterised by a series of higher highs and higher lows, indicating a bullish trend. Traders may buy on dips or breakouts of recent highs.
• Descending Staircase: Defined by lower lows and lower highs, indicating a bearish trend. Traders may sell on rallies or breakouts of recent lows.
  1. Ascending Triangle Pattern
• Formed by a horizontal resistance level met with ascending lows. Typically, a continuation pattern suggests an uptrend, confirmed by rising volume.  
  1. Descending Triangle Pattern
• Opposite of the ascending triangle, with a horizontal support level met by descending highs. Indicates a likely bearish breakout.
  1. Symmetrical Triangle Pattern
• Occurs when two trend lines converge, with no clear trend before the pattern. This bilateral pattern can break in either direction, continuing the prevailing trend
  1. Flag Pattern
• Appears as a sloping rectangle formed by parallel support and resistance lines. Often a continuation pattern, featuring a strong directional move, a counter-trend (flag), and a breakout. 
  1. Wedge Pattern
• Similar to a flag, but with converging lines. A reversal pattern that ends with a breakout opposite to the trend. Can be rising (downward breakout) or falling (upward breakout).  
  1. Double Top Pattern
• Forms an ‘M’ shape after the price hits two consecutive highs with small declines between. A bearish reversal pattern indicates a potential drop below the support level.  
  1. Double Bottom Pattern
• Forms a ‘W’ shape after the price attempts to break a support level twice, failing each time. A bullish reversal pattern signals an uptrend if the price breaks through resistance. 
  1. Head and Shoulders Pattern
• Comprises three peaks, with the central peak being the highest, creating a ‘head’ flanked by two lower ‘shoulders.’ Indicates a downtrend upon breaking the neckline support level. Rounded Top and Bottom Patterns
  • Rounded Top: An inverted ‘U’ shape, signaling a downtrend.
• Rounded Bottom: A ‘U’ shape, indicating an uptrend Cup and Handle Pattern
• Resembles a rounded bottom with a smaller dip afterward, forming a ‘handle.’ Confirms a rounded bottom and acts as a bullish reversal pattern.  Note: While candlestick charts are commonly used to identify these patterns, they can also be observed in bar charts. Understanding these patterns helps traders make informed decisions about market entries and exits.