It’s human nature for us to be attracted to patterns. Any basic form of repetition brings a sense of comfort as it signifies routine and safety. And it is this constant need for a stable pattern that plays a key part in our ‘trading psychology’. To put simply, we want to make good decisions when it comes to trading and/or understanding stock. With this comes a dependency on something called ‘stock chart patterns.’
These are a powerful asset to almost every trader from any level. Chart patterns are formations within a chart when prices are graphed. In stock and commodity markets trading, the study of chart pattern plays a significant role during technical analysis. When data is plotted, there is usually a pattern that will naturally transpire and inevitably repeat over a certain period.
In order to benefit from breakouts and reversals, you will need to learn how to recognize these chart patterns early on. By doing this, you stand a good chance of improving your profit earnings.
Their importance
At its most elementary level, stock chart patterns are an effective way to view a series of price actions. These will typically occur during a period of stock trading. This can happen over any time frame, whether it be monthly, weekly, daily, or even within a day. A notable perk of chart patterns is their tendency to repeat themselves over and over again. This repetition aids in appealing to both our human psychology and our trader mindset.
By being able to recognize these patterns as early as possible, you will gain a solid competitive advantage when working within the markets. Stock chart patterns play a big part in contributing to the identification of trend reversals and continuations. This is similar to how volume, support and resistance levels, RSI (Relative Strength Index), and Fibonacci Retracements can help with technical analysis trading.
We now get to the point where you might start to inquire about what specific chart patterns you should be on the lookout for. Below is a list of patterns that can serve as the answer to that. All of the most common patterns and their respective meanings for you as a trader are going to be highlighted. It is a good idea for you to familiarize yourself with each of these patterns. That way, you will be able to quickly recognize them while in the midst of live trading.
1) Pennant
This is a pattern that occurs whenever there is a noteworthy movement in the stock. What follows is a period consolidation, which creates the pennant shape due to the conveying lines. A breakout movement will then take place in the same direction as the big stock move. These are very similar to flag patterns and they tend to last between one to three weeks. There will be a significant volume during the initial stock movement. Following this will be a weaker volume within the pennant section and eventual growth in the volume during the breakout.
2) Cup & Handle
The name of this pattern derives from its basic shape on the chart. As you can see, the cup is a curved u-shape and the handle slopes downward a little. Generally speaking, the right-hand side of the diagram possesses low trading volume. Not only that, but it can last between seven weeks to roughly 65 weeks.
3) Ascending Triangle
This triangular pattern will appear during an upward trend and many consider it to be a continuation pattern. To put simply, it is a bullish pattern. There are times when it occurs as part of a reversal at the end of a downward trend. Nevertheless, it is more commonly known as a continuation. It does not matter when an ascending triangle occurs, as they are always bullish patterns.
4) Triple Bottom
This particular pattern is incredibly useful in technical analysis. To provide context, this is a type of trading practice and analysts use it as a way to evaluate investments. In addition, it helps them to identify trading opportunities by analyzing statistical trends that are collected from trading activity. Some of these activities include price movements and volume. The triple bottom pattern functions as a predictor of a reverse position following a long downward trend. It will typically occur whenever the price of the stock creates three distinct downward projections at around the same price level. All of this happens before breaking out and promptly reversing the trend.
5) Descending Triangle
This triangular pattern is another type of continuation pattern. However, this particular triangle is a bearish pattern and is usually created as a continuance in the middle of a downward trend. On occasion, one can easily interpret it as being a reversal during an upward trend, which is the opposite of the ascending triangle pattern. Be that as it may, most consider this pattern to be a continuation.
6) Inverse Head & Shoulders
This stock chart pattern is – much like the triple bottom pattern – a predictor. In this case, it is a predictor for the reversal of a downward trend. It is also not uncommon for many to refer to it as the “head and shoulders bottom” or the “reverse head and shoulders.” However, all of these names essentially mean the exact same thing within technical analysis. Its name derives from consisting of one larger peak, thus forming the head, and two relatively equal level peaks on either side. This effectively creates the shoulders of the pattern.
7) Bullish Symmetric Triangle
This triangular pattern is a very easy one to spot. This is because of the distinctive shape that develops as a result of the two trend lines converging. This pattern will occur by drawing trendlines, which link together an array of peaks and troughs. The trend lines will create a barrier and as soon as the price breaks through these, a very sharp movement in price will follow.
8) Rounding Bottom
This pattern is alternatively referred to as a “saucer bottom” sometimes. It illustrates a long-term reversal that shows that the stock is moving from a downward trend towards an upward trend instead. This can typically last anytime from several months to even several years. It is noticeably very similar to the cup and handles pattern, but unlike that one, there is no handle visible in this pattern.
9) Flag Continuation
This stock chart pattern forms directly through a rectangular design. The rectangle comes to fruition from two trend lines that create the support and resistance until the point breaks out. The flag will consist of sloping trend lines, and the slope should be moving in the opposite direction to the original price movement. As soon as the price breaks through either the support or resistance lines, this will create the buy or sell signal.
10) Double Top
This pattern is an extremely bearish technical reversal design that comes into fruition following an asset reaching a high price two consecutive times. Moreover, it is also with a moderate decline between the two highs. It is marked as complete as soon as the asset’s price falls below a support level that is equal to the low in between the previous two highs.
11) Bearish Symmetric Triangle
This triangular pattern is representative of a period of consolidation before the price is ultimately forced to either breakout or breakdown. A breakdown from the lower trend line will mark the beginning of a new bearish trend. A breakout coming from the upper trend line indicates the start of a brand new bullish trend.
12) Falling Wedge
This chart pattern is a bullish design that occurs whenever the market makes lower lows and lower highs within a contracting range. When this particular pattern is found in a downward trend, it then becomes a reversal pattern. This is because the contraction of the range signifies the downtrend is gradually losing steam.
13) Head & Shoulders Top
The general design of this chart pattern resembles a baseline with three peaks. The outside two peaks are fairly close in height and the middle is the highest. In the realm of technical analysis, a head and shoulders pattern describes a specific type of chart formation that will predict a bullish to a bearish trend reversal.
Additional formations
These are other chart patterns that should be taken into account. While we won’t go into as much detail about them as we have with the above-mentioned 13 patterns, it is still a good idea to look into them so that you have additional information to fall back on.
- Rising Wedge – A bearish pattern that begins wide at the bottom and contracts as prices continue to move higher. Moreover, it does this when the trading range narrows.
- Bump and Run Reversal – A reversal pattern that assembles after excessive speculation drives prices up too far and too fast.
- Price Channel – A continuation pattern that slopes either up or down and is bound by both an upper and lower trend line.
- Triple Top Reversal – A bearish reversal pattern that is typically found on bar charts, line charts, and candlestick charts. In this pattern, there are three equal highs followed by a break below support
- Measured Move (Bullish) – A three-part formation that starts off as a reversal pattern and resumes as a continuation pattern. This move consists of a reversal advance, a correction/consolidation, and a continuation.
- Measured Move (Bearish) – A three-part formation that starts off as a reversal pattern and resumes as a continuation pattern. Unlike the bullish move, this one consists of a reversal decline, consolidation/retracement, and continuation decline.
Conclusion
Hopefully, after reading this article, you will have gained enough knowledge about chart patterns to easily spot them. Further research is ideal, but at least now you have a solid jumping off point. If you're interested in diving deeper into the topic of Chart Patterns, I'd recommend a book called - 'Candlestick Patterns Mastery: 30+ Essential Patterns to Decode Market Signals—Strategies and Expert Tips for Day Trading Success' - and you can find this book on Amazon here https://amzn.to/41T1ouM
