Common Chart Patterns

Common Chart Patterns - Common Chart Patterns

What are chart patterns?

Chart patterns are the foundational building blocks of technical analysis. They keep appearing in the market in the same way over and over again, and it is not difficult to recognize them. Scalpers, day traders, swing traders, position traders, and investors may all make use of these fundamental patterns since they occur on all timeframes and can be utilized to make trading decisions. There are three different types of patterns that can be classified according to how the price is likely to behave after the completion of the pattern: reversal patterns, in which the price is likely to reverse, continuation patterns, in which the price is likely to continue its course, and bilateral patterns, in which the 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 provide a historical perspective on how prices have changed over time. By looking at the past behavior of an asset’s price, one might potentially identify patterns that are likely to reoccur in the future. In the stock, forex, and cryptocurrency markets, many traders will attempt to capitalize on the fact that candlestick patterns have the ability to communicate a meaningful narrative about the underlying asset being charted.

In this article, we will take a look at some of the most well-known patterns that are currently available; many traders consider these patterns to be solid trading indicators. Using the measures of the chart pattern, one may make a projection for the subsequent price movement and determine what the objective should be. Because these patterns may be traded in either an aggressive manner (requiring less conformity) or a cautious manner (requiring more conformance), the rules of entry and exit can be flexible.

Flags

A consolidation pattern known as a flag occurs after a significant price movement and moves in the opposite direction of the trend that has been seen over a longer period of time. It seems as if a flag is being displayed on a flagpole, with the pole representing the impulsive move and the flag representing the area of consolidation.

It is possible to employ flags in order to determine whether or not the trend will continue. Additionally significant is the loudness that accompanies the pattern. The ideal scenario calls for the impulse move to occur at high volume, whereas the consolidation phase should have lower volume that gradually decreases.

Bull flag

Bull Flag Chart Pattern - Common Chart Patterns

The bull flag happens in an uptrend, follows a sharp move up, and it’s typically followed by continuation further to the upside.

Bear flag

Bear Flag Chart Pattern - Common Chart Patterns

The bear flag happens in a downtrend, follows a sharp move down, and it’s typically followed by continuation further to the downside.

Pennant

Pennant Chart Pattern - Common Chart Patterns
Pennants are basically a variant of flags where the area of consolidation has converging trend lines, more akin to a triangle. The pennant is a neutral formation; the interpretation of it heavily depends on the context of the pattern.
Binance 10 - Common Chart Patterns

Triangles

A triangle is a kind of chart pattern that is distinguished by a price range that is gradually moving toward one another and is generally followed by the trend’s continuance. The triangle itself illustrates a temporary halt in the primary trend, but it may point to either a reversal or a continuation of the trend.

Ascending triangle

Ascending Triangle Chart Pattern - Common Chart Patterns
When there is a horizontal resistance area and a rising trend line drawn over a sequence of higher lows, the ascending triangle pattern will begin to take shape. In practice, whenever the price makes a new low after bouncing off of the horizontal resistance, buyers enter the market at higher prices, which results in higher highs. If the price ultimately breaks through the resistance region, there is a tendency for it to be followed by a sudden spike up with significant volume. This is because tension is building up at the resistance area. As a result, the ascending triangle is a pattern that indicates bullish sentiment.

Descending triangle

Descending Triangle Chart Pattern - Common Chart Patterns
The ascending triangle has the opposite shape, and this shape is called the descending triangle. It takes shape after the formation of a horizontal support region and the drawing of a falling trend line across a succession of lower highs in the price. In a manner similar to that of the ascending triangle, whenever the price makes a rebound off of the horizontal support, sellers enter the market at lower prices, hence producing higher lows. If the price breaks through the horizontal support region, the typical outcome is a sharp drop in price accompanied by a significant increase in trading volume. Because of this, it’s considered a bearish pattern.

Symmetrical triangle

Symmetrical Triangle Chart Pattern - Common Chart Patterns
The symmetrical triangle is created by two trend lines: the top trend line is decreasing, while the lower trend line is rising. Both of these trends lines have nearly the same slope. Due to the fact that its interpretation is highly dependent on the surrounding conditions, the symmetrical triangle cannot be classified as either a bullish or a bearish pattern (namely, the underlying trend). Simply said, it’s a pattern that indicates a time of consolidation, which is deemed to be neutral when seen on its own.

Wedges

Converging trend lines may be used to create a wedge, which represents price activity that is becoming more concentrated. In this instance, the trend lines demonstrate that the highs and lows are fluctuating at a different rate, and that rate is either growing or declining.
It might be an indication that a trend reversal is about to occur, given that the underlying trend is weakening. A declining volume may accompany the formation of a wedge pattern, which is another indication that the trend may be losing some of its steam.

Rising wedge

Rising Wedge Chart Pattern - Common Chart Patterns
The rising wedge is a bearish reversal pattern. It suggests that as the price tightens up, the uptrend is getting weaker and weaker, and may finally break through the lower trend line. 

Falling wedge

Falling Wedge Chart Pattern - Common Chart Patterns

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

The formation of patterns known as double tops and double bottoms may take place if the market moves in the shape of a “M” or a “W.” It is important to note that these patterns may still be accurate even if the relevant price points are not precisely the same as each other but are somewhat near to one another.

In most cases, the volume around the pattern’s two low or high points ought to be greater than the volume surrounding the remainder of the pattern.

Double top

Double Top Chart Pattern - Common Chart Patterns

The double top is a bearish reversal pattern that occurs when the price achieves a high for the second time in a row, but it is unable to continue rising after reaching that high. At the same time, there ought to be just a minor amount of retreat between the two peaks. When the price drops below the low of the pullback that occurred in between the two peaks, the pattern is considered to be validated.

Double bottom

Double Bottom Chart Pattern - Common Chart Patterns

A price formation known as a double bottom is a bullish reversal pattern that occurs when the price sustains a low price level twice before moving on to a higher high. In a manner similar to that of the double top, the bounce between the two lows need to be mild. When the price achieves a higher high than the peak of the bounce that occurred between the two lows, the pattern is considered to have been confirmed.

Head and shoulders

Head And Shoulders Chart Pattern - Common Chart Patterns

A bearish reversal pattern known as the head and shoulders consists of a baseline, also known as the neckline, and three peaks. The two peaks on the side should be nearly at the same price level as the peak in the centre, but the peak in the middle should be higher than the other two. As soon as the price breaks through the support at the neckline, the pattern is confirmed.

Inverse head and shoulders

Inverse Head And Shoulders Chart Pattern - Common Chart Patterns
This is the reverse of the head and shoulders pattern, and as such, it predicts a bullish reversal. The name of this pattern gives away its meaning. When the price of an asset has a downward trend and then drops to a lower low, followed by a rebound that finds support at about the same level as the first low, an inverted head and shoulders pattern is produced. When the price breaks through the resistance at the neckline and then continues to move higher, the pattern is confirmed.

Closing thoughts

Chart patterns that are considered to be “classic” are among the most well-known types of TA patterns. On the other hand, one shouldn’t look at them in a vacuum, as is the case with any other approach of market study. It’s possible that something that does well in one market context won’t do as well in another. A chart pattern is not the same thing as a trading method, just as a map is not the same thing as going on a trip. Your ability to plan and organize your trip effectively will affect the quality of the experience you have on your vacation. Chart patterns are most effective when utilized to generate favorable risk-to-reward ratios for trades by using a stop loss order while also allowing winners to run their course. Chart patterns illustrate the route of least resistance; yet, they are not a substitute for crystal balls in terms of their ability to forecast the future.
Last updated Sep 18, 2022

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