Trading Chart Patterns

Chart patterns play a vital role in effective technical analysis. Chart patterns are common sequences of price action that occur in all time frames and in all markets. Because these patterns are a result of human nature and psychological reactions to the markets, we can anticipate these patterns.

How to use this guide:

1. Print out the patterns below and have them visible or on-hand during your trading.

2. Read about and become familiar with each chart pattern below.

3. When trading (simulation or live), determine if your specific market is in an uptrend, downtrend, or consolidation. Depending on the market you are trading and the time frame of your charts, you may have conflicting trends on two different time frames. Use the longest time frame chart that use on a regular basis. For day traders and scalpers who use a 1-minute and a 5-minute chart, use the longer time frame chart to determine trend.

4. Navigate to the corresponding trend section below and look at your charts to see if any of the below patterns match up to your current market, either now or potentially in the future.

5. If you are familiar enough with your charting program, draw trend lines for market direction and chart pattern lines to help determine potential patterns.

6. Practice your pattern recognition skills in simulation first, then move to live trading once you achieve consistent profitability in simulation.

7. Execute what you’ve learned by trading the turns away from key support and resistance lines and on key breakouts from recognizable patterns.

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======Uptrend Continuation Patterns======

1. Symmetrical Triangle (video below)

Symmetrical triangles, a pattern with two lower highs and two higher lows, represent a steadily-increasing equilibrium among traders. Once this equilibrium reaches its tipping point, bears, in the case above, have to abandon their stance on price as volatility grows in the background. As the price suddenly breaks away from this equilibrium, violent moves tend to occur. Be aware of false breakouts, especially the first one, if the price reaches the point of the triangle. Many traders are aware of these patterns, and they tend to wait for the formation, then jump in at the same time.

2. Ascending Triangle

Ascending triangles are typically a bullish pattern in an uptrend. Because of the easily-defined and visible buildup of demand to the upside, this pattern is considered one of the most reliable patterns. Ascending triangles are recognized by their level highs and rising lows, which often results in a low volume equilibrium. The formation is only complete if the price action stays within the predetermined borders of the triangle. If at any time the price breaks through these borders, consider the triangle broken and look for the next possible pattern.

3. Falling Wedge

A falling wedge in an uptrend is usually a continuation pattern, but it can also be a reversal when the uptrend is weak or non-existent. When falling wedges occur in a downtrend, they are always reversal patterns.

Uptrend falling wedges are usually the start of a larger reversal, so be aware that the breakout may rise to the top of the triangle and turn around. Keep an eye on volume as this pattern develops. Volume will be high during the initial downturn from the high, then dwindle as traders wait for a definitive direction. Once the breakout occurs, volume will tend to spike as everyone jumps in. Look for an immediate test of the wedge line after the initial breakout. If the test holds, you may want to get in.

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4. Bull Flag

A bull flag in an uptrend is typically bullish. Bull flag patterns have two important elements – 1. a near-vertical, short-term price increase with high volume, and 2. a lower volume consolidation of profit-taking as the market takes a breather from the recent dramatic increase. Be sure that the bull flag is fairly brief, otherwise the consolidation may stifle the current uptrend. Most bull flags occur during the middle of a larger move upward.

5. Bull Pennant

Similar to the bull flag, bullish pennants involve two important elements – 1. a near vertical, high volume short-term price jump, or flag pole, and 2. a symmetrical, lower-volume triangle-shaped consolidation. This consolidation, with price maneuvering toward a single equilibrium, has a similar price action and end implications to a symmetrical triangle. Much like the bull flag, these consolidations are short term and usually occur within the middle of a larger upward move. Once the breakout occurs, be aware of a retest of the pennant’s top line. If that fails and the price turns upward, the formation is complete. If the test fails and the price comes back down to the consolidation range, the formation is no longer valid.

6. Rectangle

Rectangles can be continuation or reversal patterns, depending on the strength of the trend. If the trend is strong, a rectangle can signal a profit-taking area, which allows the demand to build and the trend to regroup. In a weak trending or flat market, rectangles can also represent a reversal pattern, similar to a triple top. Rectangles normally keep well-defined horizontal lines and pricing is considered to be well-balanced among traders.

7. Cup and Handle

The Cup and handle can be a tricky pattern with a series of additional patterns within the larger pattern, such as a double top (sides of the cup), inverted head and shoulders (cup), flags and pennants (handle). Cup and handle patterns resemble a double top formation, but the difference comes from increased volume and consolidation after the second top. This consolidation results in a buying spree that pushes price up through resistance and beyond the previous double top formation. The upside breakout from the handle should occur on strong volume, which verifies the selling pressure has been relieved. Be aware of upside breakouts and quick reversals to test the previous resistance lines, which are now support. If the test fails, look for a trade to the upside.

======6 Uptrend Reversal Patterns======

8. Rising Wedge

Rising wedges are almost always reversal patterns in an uptrend. Rising wedges represent the start of a larger reversal and can form into additional patterns, such as a rounding top. Hence, the targets after a breakout are limited. Volume is a vital piece of information with the rising wedge is forming. Volume should be high on the continuation of the trend as the first leg of the wedge forms. Volume should then decline as the consolidation nears the wedges apex. As the breakout occurs, volume should spike. Be aware of a downside breakout and retest of the previous support lines. If this test fails, be ready for a trade downward or the formation of another, larger pattern.

9. Head and Shoulders

Rising wedges are almost always reversal patterns in an uptrend. Rising wedges represent the start of a larger reversal and can form into additional patterns, such as a rounding top. Hence, the targets after a breakout are limited. Volume is a vital piece of information with the rising wedge is forming. Volume should be high on the continuation of the trend as the first leg of the wedge forms. Volume should then decline as the consolidation nears the wedges apex. As the breakout occurs, volume should spike. Be aware of a downside breakout and retest of the previous support lines. If this test fails, be ready for a trade downward or the formation of another, larger pattern.

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10. Double Top

Double top formations can be tricky if they are not well-defined. Several other formations start with a double top, such as a triple top, rectangle, and ascending triangle. The reaction to the sell side should be significant, which could be an early signal that the uptrend may be weakening. Volume should decrease as the second leg builds to the previous high. If volume increases and downward selling increases, the probability goes up for a double top formation. To confirm the formation, be sure the price closes below the reaction low. Be aware of the retest of the reaction low, which is now resistance, and get ready for a downward trade. If the downside breakout does not occur or the retest of the reaction low is successful and breaks through, the formation is no longer valid.

11. Rounding Top

In a rounding top, symmetry is an important distinction. The more reliable rounding top patterns do not wander from the boundaries of a firm semi-circle. Rounding tops can usually be compared to a head and shoulders pattern with two left shoulders, one head, and two right shoulders. Any patterns that vary from this description can potentially be another pattern all together. If volume declines on each rally upward and the price continues to rise, look for divergent price and indicators, which could start the price reversal at any time.

12. Broadening Top

The broadening top is a unique pattern because it acts opposite of a typical consolidation. As time passes, price ranges and volatility increase, instead of decrease. Volume increases as the share prices rises due, which can be confused with bullish behavior. Rallies are short-lived and price drops take out previous support levels. Broadening tops are only found in topping patterns because they are the result of unrealistic expectations on the part of bullish traders. Downside breakouts often lead to small declines followed by an instant test of the breakout level. If the stock closes above this resistance level for any reason, the pattern becomes invalid.

13. Triple Top

Triple tops can be either a reversal or continuation pattern, depending on the strength of the trend and the trough levels opposite the tops. Triple tops that do not result in a rectangle will often look like a head and shoulders pattern, a common reversal pattern. For a valid triple top, volume should decline on rallies toward the second and third top and increase into weakness. These volume trends confirm that distribution is taking place into strength. Although the lows made during the trough between the second and third tops will often exceed the reaction low, this specific price action is not necessary during the formation.

No triple top is truly complete until the price closes below the second trough’s low. Be aware of small breakouts that immediately test the breakout level.

======6 Downtrend Continuation Patterns======

14. Symmetrical Triangle - Downtrend

Symmetrical triangles, a pattern with two lower highs and two higher lows, represent a steadily-increasing equilibrium among traders. Once this equilibrium reaches its tipping point, bulls, in the case above, have to abandon their stance on price as volume grows during the breakout. As the price suddenly breaks away from this equilibrium, violent moves tend to occur. Be aware of false breakouts, especially the first one, if the price reaches the tip of the triangle. Many traders are aware of these patterns, and they tend to wait for the formation, then jump in at the same time.

15. Descending Triangle - Downtrend

Descending triangles are typically a bearish pattern in an uptrend.  Because of the easily-defined and visible buildup of demand to the downside, this formation is considered one of the most reliable continuation patterns. Descending triangles are recognized by their level lows and decreasing lows, which often results in low volume equilibrium.  The formation is only complete if the price action stays within the predetermined borders of the triangle. If at any time the price breaks through these borders, consider the triangle broken and look for the next possible pattern.

16. Rising Wedge - Downtrend

When rising wedges occur in a downtrend, they are almost always continuation patterns. This small retracement/consolidation pattern against the trend is a futile attempt by the bulls to reverse the tides, but more bears sit on the sideline waiting for the breakout to the downside. Price increases with volume decreases indicate an illegitimate price move. Volume weakens during the consolidation to the wedge point, then increases during a breakout. Be aware of immediate retests of the support levels after the break out.

17. Bear Flag - Downtrend

A bear flag in a downtrend is typically bearish. Bear flag patterns have two important elements – 1. a near-vertical, short-term price decrease with high volume, and 2. a lower volume consolidation of profit-taking as the market takes a breather from the recent dramatic decrease. Be sure that the bear flag is fairly brief; otherwise the consolidation may stifle the current downtrend. Most bear flags occur during the middle of a larger move downward.

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18. Bear Pennant - Downtrend

Similar to the bear flag, bearish pennants involve two important elements – 1. a near vertical, high volume short-term price drop, or flag pole, and 2. a symmetrical, lower-volume triangle-shaped consolidation. This consolidation, with price maneuvering toward a single equilibrium, has a similar price action and end implications to a symmetrical triangle. Much like the bear flag, these consolidations are short term and usually occur within the middle of a larger downward move. Once the breakout occurs, be aware of a retest of the pennant’s bottom resistance line. If that fails and the price turns downward, the formation is complete. If the test succeeds and the price comes back up to the consolidation range, the formation is no longer valid.

19. Rectangle - Downtrend

Rectangles can be continuation or reversal patterns, depending on the strength of the trend. If the trend is strong, a rectangle can signal a profit-taking area, which allows the demand to build and the trend to regroup. In a weak trending or flat market, rectangles can also represent a reversal pattern, similar to a triple bottom. Rectangles normally keep well-defined horizontal lines and pricing is considered to be well-balanced among traders. Once the price breaks out, be aware of a retest of the previous support line (now resistance).

======3 Downtrend Reversal Patterns======

20. Double Bottom - Downtrend

Double bottom formations can be tricky if they are not well-defined. Several other formations start with a double bottom, such as a triple bottom, rectangle, and descending triangle. The reaction to the buy side should be significant, which could be an early signal that the downtrend may be weakening. Volume should decrease as the second leg builds to the previous low. If volume increases and upward selling increases, the probability goes up for a double bottom formation. To confirm the formation, be sure the price closes above the reaction low. Be aware of the retest of the reaction high, which is now support, and get ready for a upward trade. If the upside breakout does not occur or the retest of the reaction high is successful and breaks through, the formation is no longer valid.

21. Triple Bottom - Downtrend

Triple bottoms can be either a reversal or continuation pattern, depending on the strength of the trend and the trough levels opposite the tops. Triple bottoms that do not result in a rectangle will often look like an inverted head and shoulders pattern, a common reversal pattern. For a valid triple bottom, volume should decline on price drops toward the second and third bottom and increase into weakness. These volume trends confirm that distribution is taking place into strength. Although the highs made during the trough between the second and third bottoms will often exceed the reaction high, this specific price action is not necessary during the formation. No triple bottom is truly complete until the price closes below the second trough’s high. Be aware of small breakouts that immediately test the breakout level.

22. Falling Wedge - Downtrend

Falling wedges in a downtrend are almost always reversal patterns. Downtrend falling wedges are usually the start of a larger reversal pattern, so be aware that the breakout may turn back toward the consolidation to retest, then continue in the direction of the breakout. Keep an eye on volume as this pattern develops. Volume will be high during the initial upturn from the low, then dwindle as traders wait for a definitive direction. Once the breakout occurs, volume will tend to spike as everyone jumps in. Look for an immediate test of the wedge line after the initial breakout. If the test holds, you may want to get in.

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