Chart patterns give us an indication in regards to the reversal or continuation of the current trend.  

As a trader, it is very important that we understand what these patterns indicate and how we can we can use it as an effective tool to take profitable positions.

Chart patterns can be categorised as:

Reversal patterns – Patterns indicating reversal of the current trend.
Continuation patterns – Patterns indicating a continuation in the current trend.

Let us discuss some of the popular chart patterns with high probability.

REVERSAL CHART PATTERNS


HEAD AND SHOULDERS CHART PATTERN

Head and Shoulders is a reversal chart pattern, that indicates the underlying trend is about to change.

The bullish pattern has three swing lows. The middle swing low is the lowest. The line connecting the two swing highs is the neckline.

The bearish pattern has three swing highs. The middle swing high is the highest. The line connecting the two swing lows is the neckline.

chart patterns

The pattern looks like a head with a left and right shoulder (the three swing highs), and that’s how it got its name.

A bullish chart pattern is confirmed when it breaks out above the neckline or on pullback to the neckline after the break-out.

A bearish chart pattern is confirmed when there is selling on breakout below the neckline or on pullback to the neckline after the break-out.

On both patterns, Volume should increase on breakouts.

Measure the distance between the neck and the head, and project the distance from the breakout point to find probable targets.

DOUBLE BOTTOM / DOUBLE TOP CHART PATTERN

A double Top chart pattern has two swing highs at about the same or slightly different price. It shows that buyers didn’t manage to push the price higher, and a trend reversal might be ahead.

Buy on break-out above the resistance line or on pullback to the resistance line (now acting as support) after the break-out.

A double bottom chart pattern is the opposite, with two swing lows. Sellers didn’t have the power to move the price more downward. 

chart patterns

Sell when price breaks down below the support line or on pullback to the support line after the break-out.

In both scenarios, volume should increase as price breaks out of the resistance/support line.

Measure the height of the pattern and project it from the break-out point to find probable targets.

TRIPLE BOTTOM / TRIPLE TOP CHART PATTERN

Triple Top and Bottom chart pattern has three swing highs and swing lows.

Trigger signals are the breakouts from support and resistance lines, with target prices being the distance between the top and support line (for Triple Tops) and bottom and resistance line (for Triple Bottoms).

Chart patterns

To trade a Triple Bottom chart pattern buy when breaks out above the resistance line. For a Triple Top chart pattern you can sell when price breaks out below the support line

Look for increase in volume when price breaks out of the resistance/support line.

It should also decrease with each upswing in the case of a Triple Top. For a Triple Bottom, volume should decrease with each downtrend swing.

Measure the height of the pattern and project it from the breakout point to find probable targets.

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CONTINUATION CHART PATTERNS


FLAG CHART PATTERN

A Flag pattern has a flag pole and a flag. Flags can be bullish and bearish.

A bullish flag forms during an uptrend, with parallel trendline above and below the price-action, which form a down slope. A break-out above confirms that the uptrend is resuming.

A bearish flag is similar a bullish flag, the only difference being that it forms during downtrends and has an up slope. 

chart patterns

How to trade a Flag Pattern?

  • Buy on breakout above a bullish Flag pattern.
  • Sell on breakout below a bearish Flag pattern.

Volume should decrease as the Flag pattern forms, and increase with the break-out.

For Probable Targets, measure the height of the flag pole and extend it from the lowest point of a bullish flag or the highest point of a bearish flag.

CUP AND HANDLE CHART PATTERN

A Cup and Handle pattern is a Rounding Top pattern with an additional small pullback

chart patterns

The entry for the Cup & Handle chart pattern is to buy on after it breaks the high of the cup. The aggressive entry can take place once the handle pullback fails.

For the Inverted Cup & Handle pattern, sell when the market breaks below the low of the cup or when the handle pullback breaks down.

The volume pattern should look like a Round Top / Bottom for both the cup and the handle formations.

Measure the depth of the cup and project it from its high or low for the Inverted pattern for probable targets.

RECTANGLE CHART PATTERN

A rectangle is a continuation pattern, which means it confirms that the underlying trend should continue.

When the market enters in a congestion phase, it is likely to break out in the direction of the preceding trend.

chart patterns

For a bullish pattern, buy on break-out above the resistance line. For a bearish pattern, sell on break-out below the support line.

Volume should increase when price breaks out of the resistance/support line.

Measure the height of the Rectangle and project it from the break-out point for probable targets.

Please share your important Chart patterns in the comments below!

M KithanLIBRARYTRADINGTrading Books,Trading KnowledgeChart patterns give us an indication in regards to the reversal or continuation of the current trend.   As a trader, it is very important that we understand what these patterns indicate and how we can we can use it as an effective tool to take profitable positions.Chart patterns can...Simplifying Trading