How to trade chart patterns?

Have you ever looked at the chart and had a feeling of Deja-Vu? A feeling that the
chart or candlestick pattern is repeating itself in some ways? This is because
certain movements in the market keep repeating and for this reason, there are
candlestick and chart patterns. Their history can be dated back to the very first
discovery of Japanese candlesticks and nowadays they are a necessary part of
technical analysis.
On the internet, you may find unlimited information and study materials on this
matter, and although there may be slight differences in each of the explanations, it
is important to understand the most basic ones. In this article, we will discuss the
most popular chart patterns that you can include in your trading strategy.

Reversal Chart Patterns

Reversal chart patterns are technical indicators that traders use to identify
potential buying and selling opportunities in the markets. Reversal chart patterns
are created by the movement of price and the corresponding trading volume to
identify changes in the current trend. Some of the most common reversal chart
patterns include head and shoulders, double and triple tops/bottoms. Each of
these patterns has a unique shape and provides a potential trade oppo rtunity
when the price breaks out from the pattern. It is important to note that these
patterns alone should not be used as definite indicators for an entry and should be
considered as part of the technical analysis.

Double Top/Bottom

Double top is a popular chart pattern which is used to identify potential trend
reversal. It is identified when the price of an asset shows two consecutive peaks
at the same or similar level. This pattern is considered to be a sign of bearish
reversal, as the asset’s price fails to break above the previous peak. The double
top chart pattern is made up of two peaks with a valley in between. The peaks
signify a resistance level, meaning that the asset’s price struggles to break
through it. The valley between the two peaks is called the “neckline”, and when
the price of the instrument breaks below this neckline, it is seen as a signal of the
reversal pattern. The double top formation is generally preceded by an uptrend,
and it marks the point of exhaustion of the asset’s buyers. As the buyers are
unable to push the price higher, sellers will take control of the trend and push the
asset’s price lower.
Double bottom is a technical chart pattern used by traders to predict a bullish
reversal in the instrument’s price action. The pattern is composed of two
consecutive troughs that form a "W" shape on the chart. The first trough marks the
bottom of the instrument’s previous trend, while the second trough marks the
bottom of the new trend. In between the two troughs lies a peak, which marks an
uptrend that is likely to follow. The double bottom pattern is identified by traders
when the instrument’s price action reaches the second trough and begins to rally.
It is considered an indication of strength when the security's price breaks out of
the pattern to the upside.
Triple Top/Bottom

The triple top chart pattern is a technical analysis charting pattern used to identify
potential reversal in an instrument's price. It is characterized by three near -equal
highs followed by a break below the support level. The triple top pattern is
considered to be one of the most reliable reversal patterns in technical analysis,
as it requires three distinct price peaks before the trend reverses. The pattern
usually starts with an upward trend that reaches three distinct prices. After the
third peak, the price breaks the support level, which indicates a possible trend
reversal. The trend reversal is confirmed when the price breaks the support level
again and falls below the previous low. The triple top pattern is an important
indicator of a potential trend reversal and can help traders determine when to
enter and exit positions. It is important to remember that the triple top pattern is
not a sure-fire signal of a trend reversal and should be used with other indicators.
A triple bottom chart pattern is a technical analysis indicator which is formed when
an instrument’s price records three consecutive lows at approximately the same
level. The triple bottom chart pattern indicates that sellers have tried to push the
price lower but have been met with strong buying pressure that stops the price
from falling further. This pattern, if confirmed, can signal potential reversal in the
asset's price and an increase in the overall uptrend.
Head & Shoulders

The head and shoulders chart pattern is a technical indicator that depicts a price
decline and subsequent reversal. The pattern consists of three peaks —two smaller
peaks on either side of a larger peak in the middle. The peaks are called
"shoulders" and the middle peak is called the "head." The neckline is a line drawn
along the valleys that connect the shoulders and head. When the price falls below
the neckline, it indicates a potential reversal in the trend. Traders use the head
and shoulders pattern to identify potential entry and exit points in the market.
Inverted Head & Shoulders

An inverted head and shoulders chart pattern is one of the common chart patterns
found in technical analysis. It is generally considered a reversal pattern that
typically signals an upcoming bullish trend after a period of a bearish trend or a
period of consolidation. The pattern is formed by three successive price bottoms,
with the middle bottom (head) being the lowest, and the two other bottoms
(shoulders) being higher on both sides. The pattern is completed when the price
crosses above the neckline, which is formed by connecting the high points of the
two shoulders. This indicates that the bearish trend has reversed and the price is
likely to continue its upward move.
Continuation Patterns

Continuation chart patterns are technical indicators used in trading that can
provide clues about the direction of the asset's price. They provide a way to
determine when an asset's current trend is likely to continue. These patterns are
formed on charts, usually through a series of candles or bars, and can be used to
recognize potential buy or sell signals. Common examples of continuation chart
patterns include rectangles, triangles, flags, and pennants, as well as cup and
handle patterns. These patterns are important to consider when trading, as they
can help traders identify potential buy and sell signals in the market.

Bearish/Bullish Rectangle
A bearish rectangle chart pattern is a trading pattern that occurs on a chart, when
prices move within a rectangular top and bottom range. This range is formed by
two parallel, horizontal trend lines that act as support and resistance, respectively.
After a period of consolidation, the price breaks out of the pattern in a downward
direction, signaling that a continuation of the existing bearish trend is likely. The
bearish rectangle chart pattern is considered a reliable signal of a bearish price
trend and is often used by technical traders to make trading decisions.

A bullish rectangle chart pattern is a type of technical analysis pattern that signals
a potential trend continuation and serves as a great trading opportunity. It is
formed when price movements create two horizontal lines which intersect at two
opposite ends, creating a “rectangle” shape. The price action appears to
“consolidate” within the rectangle area and typically breaks out of this area in the
direction of the ‘bullish’ sentiment. A bullish rectangle chart pattern is typically
seen as a sign of strength and a likely indication that the trend is set to move
upwards. To confirm a breakout, the price should close above the upper
resistance line of the rectangle chart pattern. In short, a bullish rectangle chart
pattern is an indication of an uptrend and can be used to spot potential trading
opportunities.
Bearish/Bullish Flag

A bearish flag chart pattern is a technical analysis term used to describe a price
formation that is typically seen after a strong directional move downward. This
price formation is characterised by two declines separated by a brief consolidating
retracement period. The flagpole forms at an almost vertical panic price drop, as
bulls get blindsided by the sellers. After a bounce, the flag has parallel upper and
lower trendlines, which form the flag. The initial sell-off comes to an end through
some profit-taking and forms a tight range. This illustrates that there is still selling
pressure present, although traders are also entering long positions looking for a
reversal. During the consolidation, traders should be prepared to take action
should price break down through the lower range level and/or make a new low.
When the lower trendline breaks, it typically triggers panic sells as the downtrend
resumes another leg down.
A bullish flag chart pattern in trading is a technical chart pattern that signals a
likely increase in prices. It is characterised by a sharp countertrend (the flag) that
follows a short-lived trend (the pole). This pattern resembles a flag with masts on
either side and is followed by a substantial increase in the upward direction. The
primary goal of a bull flag pattern is to enable traders to profit from the market's
current momentum, and after the pattern is spotted, traders use the volume
indicator to predict the direction of the trend and determine the entry point. The
breakout from this pattern often results in a powerful move higher, measuring the
length of the prior flag pole. It is considered to be a formidable pattern to trade, as

long as all elements are in place.

Bearish/Bullish double pennant

A bearish pennant chart pattern is a technical analysis indicator that typically

forms after a sharp price decline, followed by a period of consolidation. This
consolidation period can last from one to several weeks, giving traders a chance
to observe the pattern closely and make an informed decision. When the price
breaks out of the triangle of the pattern, it indicates that the bearish trend is likely
to continue. Traders may enter short positions in t he market when the price breaks
out of the triangle. It is important to be careful when trading bearish pennant
patterns, as false breakouts can occur and result in losses. It is also important to
pay attention to other indicators, such as volume and momentum, to confirm the
pattern.
A bullish pennant is a continuation chart pattern which forms when the price of a
security consolidates in a symmetrical triangular pattern before breaking out in the
same direction as the previous trend. The pattern is composed of two consecutive
pennants, with the second pennant having a smaller range than the first. During
the formation of the pattern, the price will usually move in a narrow range and
form two converging trend lines. The pattern typically appears during an uptrend,
and when the price breaks out above the upper trend line, it signals a continuation
of the preceding uptrend.
Cup & Handle / Inverted Cup & Handle

It is a chart pattern that looks like a cup with a handle and is used to identify areas
of support and resistance. The pattern starts with a cup formation, which shows a
period of gradual increase in price, followed by a slight decrease. After the
decrease, the price moves higher, forming the handle. When the price of an
instrument breaks above the high of the handle, it is considered a buy signal.

Inverted cup and handle is a chart pattern which is identical to the cup and handle,
except for the fact that once it forms bearish trend is expected to continue. This is
the reason this chart pattern is one of the continuation chart patterns as it
represents the retracement of the higher trend. If the price of an instrument breaks
the support level of the handle, traders may anticipate a bearish trend.
Bilateral/Neutral Patterns

Symmetrical triangle

A common chart pattern observed in technical analysis is a symmetrical triangle. It

occurs when an asset's price moves in a converging triangle pattern and looks like
a neutral pattern, which means that regardless of the previous price movement,
the asset's price is anticipated to move forward in any direction. Traders will
typically take long and short positions as the price moves between the two trend
lines and develops toward the pinnacle of the pattern, which is commonly found in
strong trends. Additionally, price targets can be defined using the symmetrical
triangle chart pattern.
Rising wedge

A rising wedge chart pattern is formed by two trend lines that slope upward,
connecting a series of lower highs and higher lows. A rising wedge chart pattern
typically indicates a bearish reversal in momentum, as the stock or commodity
prices move lower after the pattern is complete. The resistance line is the higher
trend line, and the support line is the lower trend line. The formation of a rising
wedge chart pattern can take several days, weeks, or even months. When the
price crosses through the lower trend line, indicating a change in momentum from
bullish to negative, the pattern is said to be finished. When the price fails to reach
a new peak and instead moves downward, the pattern may also be deemed to be
finished. Once the pattern is complete, traders look for opportunities to go short in
anticipation of further price declines.
Falling wedge

A falling wedge chart pattern is a technical analysis indicator used in trading to

identify potential entry signal. It has the appearance of a wedge because of two
trendlines that are convergent. Given that the converging trendlines show
weakening bearish momentum, the pattern is thought to suggest a possible bullish
reversal. The two trendlines can converge over a time of several days, few weeks
or months and must stay within the wedge's confines the entire time. The pattern
is void if the price shifts outside of the wedge. Traders watch for a price breakout
from the upper trendline once the pattern is verified. This suggests that the market
will eventually turn bullish as buyers take over.
Final words

Some traders are heavily against trading with chart patterns and there are also
some traders that would swear by this technique. Chart patterns are one of the
basic theories of technical analysis as they provide a first signal in the probability
of next price movements. However, relying purely on chart patterns is not
sufficient as there are other factors that affect the price movement of instruments.
It is needless to say that criteria to enter a position must be clearly defined with a
proper fundamental and technical analysis. If you are unsure about identifying the
trading pattern, Autochartist is the analytical service for recognizing the trading
patterns in the markets and analysing volatility on all instruments. It provides
traders with meaningful and performance-proven statistics that can help build an
edge in the markets.

Follow us on:
Instagram: Trading Kannadiga

Youtube: Trading Kannadiga