Chart Patterns

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For a long time, people have been looking at the Earth and the sky, trying to see patterns and understand them. Even though we know a lot more now than our ancestors did, we still have the same natural urge to find patterns. Whether trading or while we are analyzing markets, we either try to find patterns or create patterns without even knowing. In the trading world, chart patterns help to analyze price movements through graphical formations.

These patterns can give hints to traders about trends, price reversals, bullish or bearish continuation. Some patterns give target prices for trading setup, some of them hint at new trends but above all, patterns give a signal to traders about good entry points and good stop points to manage risk.

In this article, you can learn simple and most used price patterns in technical analysis. In addition, we are going to talk about different ways to trade by using these patterns. But this article is prepared to display another way to evaluate trading decisions because there is not just one right way in technical analysis and there is not a way that is always right.

1. Double Top Pattern

The double top is a bearish reversal pattern. After an uptrend movement, made a top point, decline a little, and create a support point (neckline), the price goes up and test this top point and reverse again. This shows that the price level at these tops is significant and bearish traders coming to markets at that level. The pattern is considered to be complete when the price breaks below the neckline it is expected to fall below the neckline equal to the top.

Trade Idea 1: At the breakout level, sell. Stop if one or two close candles above the neckline. Take profit at the price target.

Trade Idea 2: More risky option. Sell when there are signs of reversal at the second top and stop if the price returns and breaks above the first top. If the pattern completes and the price break below the neckline move your stop to the above neckline. You can take profit at the price target level or determine an appropriate moving average to use as a moving stop.

2. Double Bottom Pattern

The double bottom pattern is the opposite of the double top. After a downtrend movement, 2 bottoms at closely similar levels and between them a resistance neckline. This pattern is considered to be complete when the price breaks above the neckline and it’s expected to increase above the neckline equal to the difference between the bottom and neckline.

Trade Idea 1: At the breakout level, buy. Stop if one or two candles go below the neckline. Take profit at the price target.

Trade Idea 2: More risky option. Buy when there is a sign of reversal at second-bottom and stop if price returns and breaks below bottom levels. If the pattern completes itself and breaks above the neckline move your stop below the neckline. Take profit at the target price or determine an appropriate moving average to use as a moving stop.

3. Head and Shoulders Pattern

Head and shoulders pattern is usually a reversal pattern. After an uptrend it forms two tops, the second one is above the first then decline the same support level. After that, there is another bullish try but the third top can’t get above the second, and bullishness starts to disappear. But the formation becomes completed when the price breaks below the neckline. Price is expected to fall equal to the difference between head and neckline.

Trade idea 1: Sell at a breakout or if late at backtest if one appears. Stop if one or two close candles over the neckline. Take profit at the target price.

Trade idea 2: More safe option. Sell half of the planned positions at a breakout and if price back-test neckline again and could not break sell the second half. Take profit at the target price or determine an appropriate moving average and use it as a moving stop loss.

4. Inverse Head and Shoulders Pattern

Inverse head and shoulders are usually a reversal pattern. After a downtrend it forms two bottoms, the second one is below the first then rises the same resistance level. After that, there is another bearish try but the third bottom can’t get above the second, and bearishness start to disappear. But the formation becomes complete when the price breaks above the neckline. Price expected to rise equal to the difference between head and neckline.

Trade idea 1: Buy at a breakout or if late at backtest if one appears. Stop if one or two close candles above the neckline. Take profit at the target price.

Trade idea 2: More safe option. Buy half of the planned positions at a breakout and if the price, back-test neckline again and could not break, buy the second half. Take profit at the target price or determine an appropriate moving average and use it as a moving stop loss.

5.Bullish Flag Pattern

The bullish flag is a continuation pattern. It may appear in a mid uptrend when the trend gets a brief pause. It can be a parallel horizontal or shorter-term mild downtrend. A bullish flag completes when it breaks above resistance. Price expected to be rise equal to the first movement before the flag.

Trade Idea 1: Buy at the breakout level. Stop if the price breaks the lower line. After some time determine an appropriate moving average and use it as a moving stop-loss. Take profit at the target price.

Trade Idea 2: Buy at the breakout level. Determine an appropriate moving average and use it as a moving stop loss. Don’t take profit, use moving stop, and ride the trend.

6. Bearish Flag Pattern

The bearish flag pattern is a continuation pattern. It may appear in a mid downtrend when the trend gets a brief pause. It can be a parallel horizontal or shorter-term mild uptrend. Bearish flag completes when price breaks below resistance. Price expected to fall equal to the first movement before the flag.

Trade Idea 1: Sell at the breakout level. Stop if it breaks the upper line. After some time determine an appropriate moving average and use it as moving stop-loss. Take profit at the target price.

Trade Idea 2: Sell at the breakout level. Determine an appropriate moving average and use it as a moving stop-loss. Don’t take profit, use the moving stop, and ride the trend.

7. Cup and Handle Pattern

Cup and handle usually have a long-term continuation pattern. It can be upward or downward, usually seen at growth stocks or charts that move exponential trends (like USDTRY). After an aggressive peak at the end of an uptrend, price fall then rises again over longer-term, crates a “cup” like pattern, and test the first peak. After that failed test a second smaller cup pattern is formed like a handle of the cup. Formation completes when price breaks above neckline. Price expected to rise equal to the difference between the neckline and lowest point of the cup. Cup & handle formation is a long-term chart pattern and may not break at one try and there can be many backtests but it has a high probability target price and a big reward/risk ratio.

Trade Idea 1: Buy at the breakout level. Determine an appropriate long-term moving average or a trend line as a moving stop-loss. Take profit at the target price.

Trade Idea 2: Buy at an upward reversal after a backtest. Determine an appropriate long-term moving average or a trend line as moving stop-loss. Don’t take profit and ride the trend until stops.

8. Bullish Trend Channel

Bullish trend channels occur when higher highs and higher lows occur in form of two parallel lines. Price is expected to rise as long as the trend does not break down. When breaks below, the trend may change to downward or pause for some time and consolidate.

Trade Idea 1: Buy at a bottom near the lower trend line, take profit when the price is near the upper trend line. Stop if the price breaks below. Sell at the upper trend line and close near the lower line or for more safe trading don’t open short positions on the bullish trend.

Trade Idea 2: Buy at a near lower line and don’t take profit. Ride the trend until the lower line break below.

Trade Idea 3: Sell at breakout. Determine an appropriate moving average and use it as stop-loss. Ride bearish trend if one appears.

9. Bearish Trend Channel

A bearish trend channel occurs when lower lows and lower highs occur in form of two parallel lines. Price is expected to fall as long as the trend does not break up. When breaks above, the trend may change to upward or pause for some time, consolidate.

Trade Idea 1: Sell at a top near the upper trend line, take profit when the price is near the lower trend line. Stop if the price breaks above. Buy at the lower trend line and close near the upper line or for more safe trading don’t open long positions on the bearish trend.

Trade Idea 2: Sell at near upper line and don’t take profit. Ride the trend until the upper line breaks above.

Trade Idea 3: Buy at breakout. Determine an appropriate moving average and use it as stop-loss. Ride bullish trend if one appears.

10. Bullish Wedge Pattern

A bullish wedge can be a reversal or continuation pattern. Like a bearish trend channel, we can see lower highs and lower lows. The difference is trend lines are not parallel and contract rapidly. This means there is a bearish trend but it is losing power. Bullish wedge pattern completes when price breaks above the upper line. It is expected to form an uptrend afterward.

Trade Idea: Buy at the breakout. The earlier top can become support. Stop below this support (one or two closed candles below support). After the uptrend starts to settle use an appropriate moving average or trend line as a moving stop-loss. Ride the trend.

11. Bearish Wedge Pattern

A bearish wedge can be a reversal or continuation pattern. Like bullish trend channels, we can see higher highs and higher lows. The difference is trend lines are not parallel and contract rapidly. This means there is a bullish trend but it is losing power. Bearish wedge pattern completes when price break below the lower line. It is expected to form a downtrend afterward.

Trade Idea: Sell at the breakout. The earlier bottom can become resistant. Stop above this support (one or two closed candles below support). After the downtrend starts to settle use an appropriate moving average or trend line as a moving stop-loss. Ride the trend.

12. Symmetrical Triangle Pattern

Symmetrical Triangle pattern forms when price contracting without clear direction, low getting higher and highs getting lower. It can become a continuous or reversal pattern. Triangle formation becomes complete when price break for one way. If it breaks below, a downtrend, if it breaks above, an uptrend is expected to form. There are two different ways to set a price target. First is drawing the parallel of the upper line (if the breakout is downside) from the start of the lower line and the price expected to fall to its extension; the second way is equal to the first top and bottom difference from breakpoint.

Trade Idea: Sell at the breakout level. Stop above an appropriate moving average or at the upper trend line. Take profit on your choice of target price.

13. Ascending Triangle Pattern

Ascending triangle formation is a right triangle in which whose lower line forms higher lows and the upper line is horizontal. This means the price is trying to rise but there is a powerful resistance up top. After continuously testing the upper line ascending triangle is expected to break upwards. Price target can be determined the same way as a symmetrical triangle, drawing the parallel of the lower line or difference equal to fit top and bottom from the upper line.

Trade Idea 1: Buy at the breakout. Stop if one or two candles close below the horizontal line. Take profit at your choice of price target.

Trade Idea 2: Buy at one of the bottoms of the triangle when it is starting to shape up. Stop if a lower line breaks below. After breakout and ascending triangle formation become complete, move your stop to just below the horizontal line. Take profit first half of your positions at the target one and move your stop to a moving average. Take profit second half at target two or ride the trend until stop.

14. Descending Triangle Pattern

Descending triangle formation is a right triangle whose upper line form lower highs and the lower line is horizontal. This means the price is trying to fall but there is powerful support down below. After continuously testing the lower line descending triangle is expected to break downwards. Price target can be determined the same way as a symmetrical triangle, drawing the parallel of upper line of difference equal to fit top and bottom from the lower line.

Trade Idea 1: Sell at the breakout level. Stop if one or two candles close above the horizontal line. Take profit at your choice of price target.

Trade Idea 2: Sell at one of the tops of the triangle when it is starting to shape up. Stop if the upper line breaks above. After breakout and descending triangle formation become complete, move your stop to just above the horizontal line. Take profit first half of your positions at target one and move your stop to a moving average as a moving stop. Take profit second half at target two or ride the trend until stop.

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