Trading - chart patterns

Trading – the Most Popular Patterns



  1. What is pattern in tech analysis?
  2. Head & Shoulders and Inverted Head & Shoulders chart patterns
  3. Double Top and Double Bottom chart patterns
  4. Triple Top and Triple Bottom chart patterns
  5. Wedge chart pattern
  6. Diamond chart pattern
  7. Rectangle chart pattern
  8. Flag chart pattern
  9. Triangle chart pattern

1. What is a pattern in tech analysis?

A pattern means a repeated element in different spheres of life – nature, psychology, music, design, trading, etc. When it comes to trading, a pattern is a stable and repeated combination of data on prices, volumes, or indicators. Chart patterns are specific and repeated areas on the price charts and sometimes they are called price patterns.

Over the years of monitoring financial markets, it was noticed that from time to time the price charts showed chart patterns (or price patterns), which might be used to predict further movements. There are patterns that indicate the reverse of tendencies and there are patterns that show their continuation. Here, it would be important to note that formation of price patterns on charts does not 100% mean that the price will move as these patterns predict, but this possibility is pretty high and may help in trading.

2. Head & Shoulders and Inverted Head & Shoulders chart patterns

These are reversal patterns, which are usually formed at local lows and highs of the price chart within either ascending or descending trend. The patterns indicate that the current tendency is getting weaker and the price is expected to either start a correction or reverse the tendency to the opposite side.

Head & Shoulders

Head & Shoulders is formed at highs within an ascending tendency. A bottom line is drawn through 1 and 2 (neckline). The pattern is considered completely formed only after the price fixes below the bottom line. After that, the price is expected to fall by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s high to the neckline. One is recommended to sell right when the price breaks the bottom line or wait until it returns to the line after breaking it. 

Head & Shoulders

Inverted Head & Shoulders

Inverted Head & Shoulders is formed at lows within a descending tendency. A bottom line is drawn through 1 and 2 (neckline). The pattern is considered completely formed only after the price fixes above the bottom line. After that, the price is expected to grow by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s low to the neckline. One is recommended to buy right when the price breaks the bottom line or wait until it returns to the line after breaking it.

Inverted Head & Shoulders

3. Double Top and Double Bottom chart patterns

These are reversal patterns, which are usually formed at local lows and highs of the price chart within either ascending or descending trend. The patterns indicate that the current tendency is getting weaker and the price is expected to either start a correction or reverse the tendency to the opposite side.

Double Top pattern

Double Top is formed at highs within an ascending tendency. A horizontal bottom line is drawn through 1. The pattern is considered completely formed only after the price fixes below the bottom line. After that, the price is expected to fall by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s highs to the bottom line. One is recommended to sell right when the price breaks the bottom line or wait until it returns to the line after breaking it.

Double Top

Double Bottom pattern

Double Bottom is formed at lows within a descending tendency. A horizontal bottom line is drawn through 1. The pattern is considered completely formed only after the price fixes above the bottom line. After that, the price is expected to grow by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s lows to the bottom line. One is recommended to buy right when the price breaks the bottom line or wait until it returns to the line after breaking it.

Double Bottom

4. Triple Top and Triple Bottom chart patterns

These are reversal patterns, which are usually formed at local lows and highs of the price chart within either ascending or descending trend. The patterns indicate that the current tendency is getting weaker and the price is expected to either start a correction or reverse the tendency to the opposite side.

Triple Top pattern

Triple Top is formed at highs within an ascending tendency. A bottom line is drawn through 1 and 2. The pattern is considered completely formed only after the price fixes below the bottom line. After that, the price is expected to fall by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s highs to the bottom line. One is recommended to sell right when the price breaks the bottom line or wait until it returns to the line after breaking it.

Triple top

Triple Bottom pattern

Triple Bottom is formed at lows within a descending tendency. A bottom line is drawn through 1 and 2. The pattern is considered completely formed only after the price fixes above the bottom line. After that, the price is expected to grow by the distance equal to, at least, the pattern height, which is measured in pips from the pattern’s lows to the bottom line. One is recommended to buy right when the price breaks the bottom line or wait until it returns to the line after breaking it.

Triple Bottom

5. Wedge chart pattern

Wedge is a reversal pattern, which is formed at highs and lows between two convergent lines, support and resistance. The pattern has some similar features of “Triangle” with the key distinction being skew angle (of both lines forming it) in the same direction. “Wedge” is considered broken when the price leaves the pattern in the direction that is opposite to the skew. If “Wedge” is formed at highs within an ascending tendency, one is recommended to sell after the price fixes below the support line; the target of the pattern is the value of the pattern’s base (H) in pips. If “Wedge” is formed at lows within a descending tendency, one is recommended to buy after the price fixes above the resistance line; the target of the pattern is the value of the pattern’s base (H) in pips.

Wedge

6. Diamond chart pattern

Quite rare reversal pattern in the form of a diamond. It is formed at local highs and lows of the price chart within either ascending or descending trend. The patterns indicate that the current tendency is getting weaker and the price is expected to either start a correction or reverse the tendency to the opposite side. If “Diamond” is formed at highs within an ascending tendency, one is recommended to sell after the price fixes below the support line; the target of the pattern is the pattern’s height (H) in pips. If “Diamond” is formed at lows within a descending tendency, one is recommended to buy after the price fixes above the resistance line; the target of the pattern is the pattern’s height (H) in pips.

Diamond chart pattern

7. Rectangle chart pattern

Rectangle is a universal pattern that may predict both a reverse and a continuation of an actual tendency. It looks like a sideways channel formed by horizontal support and resistance level, where the price is consolidating. It is recommended to trade in the direction the pattern is broken – if the price fixes above the resistance line, buy; if it fixes below the support line, sell. The target of the pattern is the pattern’s height (H) in pips.

Rectangle chart pattern

8. Flag chart pattern

A continuation pattern of an actual tendency. It looks like a flag: after a strong price movement (Flagpole), the price is forming a correctional area (Cloth), which is either horizontal or sloping towards the Flagpole. The Cloth may take the form of Rectangle, Triangle, or Wedge. After the price completes the correction and fixes above the resistance line of the Cloth, one is recommended to buy. The target of the pattern is the Flagpole’s height.

Flag chart pattern
Flag chart pattern

9. Triangle chart pattern

There are three key types of Triangle patterns:

Symmetrical Triangle

A universal pattern that may predict both a reverse and a continuation of an actual tendency. It is formed between two convergent lines, support and resistance. It is recommended to trade in the direction the pattern is broken – if the price fixes above the resistance line, buy; if it fixes below the support line, sell. The target of the pattern is the value of the pattern’s base (H) in pips.

Symmetrical Triangle

Ascending Triangle

An upside continuation pattern, which is formed between a horizontal resistance line and an ascending support line. After the price fixes above the resistance line, one is recommended to buy; the target of the pattern is the value of the pattern’s base (H) in pips.

Ascending Triangle

Descending Triangle

A downside continuation pattern, which is formed between a horizontal support line and a descending resistance line. After the price fixes below the support line, one is recommended to sell; the target of the pattern is the value of the pattern’s base (H) in pips.

Descending Triangle


Left unedited for writing style, spelling or punctuation.


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