Being able to interpret chart patterns, and trading charts in general, is a vital component of a successful technical trader. In this guide, we will take you through 10 of the most important chart patterns in trading, along with what they mean, and how to trade them.
How to spot chart patterns in trading?
In the same way that art to the untrained eye can simply be brushed off (pun intended) as strokes of a paintbrush; at first, trading charts without any technical indicators, or overlays, can simply appear to be lines, or candles on a screen.
Beauty is, so they say, in the eye of the beholder, and behind what you see at first can actually be a masterpiece of data points that can be interpreted in many different ways.
So how do you know which chart patterns to pay attention to, what are the most popular chart patterns to trade, which charting software is worth using, and which patterns you see in charts are in fact nothing more than lines on a screen?
Top chart patterns to pay attention to
As promised, you will find below 10 of the most important chart patterns in trading that you will want to know, along with how to interpret them from a directional signal perspective. After all, what good is knowing what the chart patterns look like if you dont know how to trade them?
1. The Head and Shoulders Pattern
One of the most classic chart patterns, the head and shoulders pattern is a bearish reversal signal that can be seen in nearly any market. It’s characterized by a left shoulder, head, and right shoulder, with the right shoulder typically being lower than the left. To confirm the head and shoulders pattern, traders typically look for a move below the neckline. The pattern typically forms after an uptrend, and the breakout usually occurs in the direction of the previous trend.
2. The Inverse Head and Shoulders Pattern
The inverse head and shoulders is just the opposite of the head and shoulders pattern, and is instead a bullish reversal signal. It’s characterized by a left shoulder, head, and right shoulder, with the right shoulder typically being higher than the left. To confirm the inverse head and shoulders pattern, traders typically look for a move above the neckline.
3. Triangle Chart Patterns
The triangle pattern is a continuation pattern that can be either bullish or bearish, depending on the direction of the breakout. There are three different types of triangle patterns – ascending, descending, and symmetrical.
- Ascending Triangle – An ascending triangle is a bullish continuation pattern that’s characterized by a flat top and an upward-sloping bottom.
- Descending Triangle – A descending triangle is a bearish continuation pattern that’s characterized by a flat bottom and a downward-sloping top.
- Symmetrical Triangle -A symmetrical triangle is a neutral continuation pattern that’s characterized by converging trendlines.
4. Wedge Patterns
The wedge pattern is a continuation or reversal pattern that can be either bullish or bearish, depending on the direction of the breakout. There are two types of wedge patterns – rising and falling. A rising wedge is a bearish continuation or reversal pattern that’s characterized by a rising bottom and a falling top. A falling wedge is a bullish continuation or reversal pattern that’s characterized by a falling bottom and a rising top.
- Falling wedge – The falling wedge is a bullish continuation pattern that’s characterized by a falling bottom and a rising top. The pattern typically forms after an downtrend, and the breakout usually occurs in the direction of the previous trend.
- Rising wedge – The rising wedge is a bearish continuation pattern that’s characterized by a rising bottom and a falling top. The pattern typically forms after an uptrend, and the breakout usually occurs in the direction of the previous trend.
5. The Flag Pattern
The flag pattern is a continuation pattern that’s characterized by a consolidation period after a sharp move in price. There are two types of flag patterns – bullish and bearish. A bullish flag pattern is a continuation pattern that’s characterized by a consolidation period after an uptrend. A bearish flag pattern is a continuation pattern that’s characterized by a consolidation period after a downtrend.
6. The Pennant Pattern
The pennant pattern is a continuation pattern that’s very similar to the flag pattern. It’s characterized by a consolidation period after a sharp move in price. There are two types of pennant patterns – bullish and bearish. A bullish pennant pattern is a continuation pattern that’s characterized by a consolidation period after an uptrend. A bearish pennant pattern is a continuation pattern that’s characterized by a consolidation period after a downtrend.
7. The Double Bottom Pattern
The double bottom pattern is a bullish reversal pattern that’s characterized by two lows around the same price level. The second low typically has higher volume than the first low, and is followed by a move higher. To confirm the double bottom pattern, traders typically look for a move above the resistance level.
8. The Double Top Pattern
The double top pattern is a bearish reversal pattern that’s characterized by two highs around the same price level. The second high typically has higher volume than the first high, and is followed by a move lower. To confirm the double top pattern, traders typically look for a move below the support level.
9. The Triple Bottom Pattern
The triple bottom pattern is a bullish reversal pattern that’s characterized by three lows around the same price level. The third low typically has higher volume than the first two lows, and is followed by a move higher. To confirm the triple bottom pattern, traders typically look for a move above the resistance level.
10. The Triple Top Pattern
The triple top pattern is a bearish reversal pattern that’s characterized by three highs around the same price level. The third high typically has higher volume than the first two highs, and is followed by a move lower. To confirm the triple top pattern, traders typically look for a move below the support level.
Chart Pattern Summary
When using chart patterns as part of your technical trading, you should always keep in mind that no single pattern, and no single indicator will work well alone. You would ideally want to confirm your patterns with other indicators, or signals, to ensure that you are taking advantage of the best trading opportunities.
Taking your time to familiarise yourself with as many different technical tools as possible will give you the best possible chance of success, as even when you are not trading directly using these chart patterns or indicators yourself, they can still provide you with great insights in to what other traders may be doing, and what areas they may be paying attention to.
Knowing that there is significant level of support resistance at the same point of a neckline on a head and shoulders pattern for example, could give you an idea as to what the market behaviour may be when that level is reached. Trying to find a small edge on the market, and being as well prepared as possible by expanding your knowledge will certainly not harm your chances.