Common Chart Patterns
What are chart patterns?
Chart patterns are the foundational building blocks of technical analysis. They repeat themselves in the market time and time again and are relatively easy to spot. These basic patterns appear on every timeframe and can, therefore, be used by scalpers, day traders, swing traders, position traders and investors. There are 3 types of patterns, depending on how price is likely to behave after completion: reversal patterns, where price is likely to reverse, continuation patterns, where price is likely to continue its course and bilateral patterns, where price can go either way, depending on whether it breaks to the upside or to the downside.
If you’re not familiar with reading candlestick charts, start by checking out our guide – What Is A Candlestick Chart?
Charts present a historical overview of prices over time. The idea is that by studying the historical price action of an asset, recurring patterns may emerge. Candlestick patterns can tell a useful story about the charted asset, and many traders will try to take advantage of that in stock, forex, and cryptocurrency markets.
In this article we’ll review some of the most well-known patterns out there, and many traders see these as reliable trading indicators. The measurements of the chart pattern can be used to project the next price movement and what target to aim for. These patterns can either be traded aggressively (with less conformation) or conservatively (with more conformation) so the rules of entry and exit can vary.
A flag is an area of consolidation that’s against the direction of the longer-term trend and happens after a sharp price move. It looks like a flag on a flagpole, where the pole is the impulse move, and the flag is the area of consolidation.
The bull flag happens in an uptrend, follows a sharp move up, and it’s typically followed by continuation further to the upside.
The bear flag happens in a downtrend, follows a sharp move down, and it’s typically followed by continuation further to the downside.
A triangle is a chart pattern that’s characterized by a converging price range that’s typically followed by the continuation of the trend. The triangle itself shows a pause in the underlying trend but may indicate a reversal or a continuation.
The falling wedge is a bullish reversal pattern. It indicates that tension is building up as price drops and the trend lines are tightening. A falling wedge often leads to a breakout to the upside with an impulse move.
Double top and double bottom
Double tops and double bottoms are patterns that occur when the market moves in either an “M” or a “W” shape. It’s worth noting that these patterns may be valid even if the relevant price points aren’t exactly the same but close to each other.
The double top is a bearish reversal pattern where the price reaches a high two times and it’s unable to break higher on the second attempt. At the same time, the pullback between the two tops should be moderate. The pattern is confirmed once the price breaches the low of the pullback between the two tops.
The double bottom is a bullish reversal pattern where the price holds a low two times and eventually continues with a higher high. Similarly to the double top, the bounce between the two lows should be moderate. The pattern is confirmed once the price reaches a higher high than the top of the bounce between the two lows.
Head and shoulders
The head and shoulders is a bearish reversal pattern with a baseline (neckline) and three peaks. The two lateral peaks should roughly be at the same price level, while the middle peak should be higher than the other two. The pattern is confirmed once the price breaches the neckline support.
Inverse head and shoulders