Definition of pattern

A pattern is a repeating combination of financial instrument prices and trading volumes, graphical objects, and technical indicators, allowing the trader to predict the possible future direction of the price chart.

The use of patterns in trading is based on the assumption that price can repeat previous patterns of behaviour when similar chart conditions occur.

By working with patterns, a trader can estimate the approximate potential of a trade and determine entry, opening, or closing points. The formation of a pattern on a chart indicates the likelihood of a certain scenario occurring in the future but does not guarantee it.

Types of patterns

On the method of analysis:

  • Graphic
  • Candlelight
  • Price Action models
  • Harmonic

By price direction:

  • U-turns
  • Trend continuation patterns
  • Double-sided figures

Graphic patterns

This pattern is related to technical analysis, and provides for the construction of additional graphical objects – for example, lines of support and resistance levels. For instance, in the Head & Shoulders pattern, a neckline is completed, the breakdown of which will signal the beginning of a downtrend.

Popular reversal chart patterns:

  • Head and Shoulders
  • Upside-down Head and Shoulders
  • Double Top
  • Triple Bottom
  • Triple Top

Popular graphical trend continuation patterns:

  • Flag
  • Upside-down Flag
  • Pennant
  • Upside-down Pennant
  • Cup and Handle
  • Upside-down Cup and Handle

Bidirectional graphic patterns:

  • Triangle
  • Wedge

Candlestick patterns

Candlestick patterns consist of one or more Japanese candlesticks, which show current market conditions, and indicate a possible repetition of a certain algorithm for further price movement.

Popular reversal candlestick patterns:

  • Hammer
  • Upside-down Hammer
  • Hanging Man
  • Harami

Popular trend continuation candlestick patterns:

  • Three Methods
  • Mat Hold

Price Action models

Price Action is one of the areas of technical analysis that uses a charting-free method of evaluating charts, and involves making decisions only on the basis of the price movement of a financial instrument.

Popular Price Action patterns:

  • Pin Bar/ Pin Bar
  • Inside Bar
  • Outside Bar
  • Rails
  • TBH
  • TBL

Harmonic patterns

These graphical geometric patterns consist of several bars forming four or more price extremes and correspond to a certain value on the Fibonacci grid. They help the trader identify a possible trend change location.

Popular harmonic patterns:

  • ABCD
  • Butterfly
  • Bat
  • Crab
  • Shark
  • Three Movements

The risks of using patterns

  • There is no guarantee that the price behaviour pattern of a financial instrument will repeat itself
  • Defining and identifying patterns on a price chart is characterised by a high level of subjectivity
  • Patterns can combine to give different signals
  • Patterns that are not fully formed can give false signals