Stock chart patterns are lines and shapes drawn onto price charts in order to help predict forthcoming price actions, such as breakouts and reversals. They are a fundamental technical analysis technique that helps traders use past price actions as a guide for potential future market movements.
Chart patterns are an integral aspect of technical analysis, but they require some getting used to before they can be used effectively. To help you get to grips with them, here are 10 chart patterns every trader needs to know.
A chart pattern is a shape within a price chart that helps to suggest what prices might do next, based on what they have done in the past. Chart patterns are the basis of technical analysis and require a trader to know exactly what they are looking at, as well as what they are looking for.
Technical analysis is one of the best tools traders can use to spot shifts within the market, allowing them to predict support and resistance levels within a predictable timeframe.
There are many different continuation and reversal patterns to look out for when reading the stock charts. This list of 15 chart patterns are essential, and knowing them will give an investor a trading edge, so it pays to keep these close. Looking for these chart patterns every day, studying the charts will allow the trader to learn and recognize technical trading strategies in the data and the implications that these patterns imply.
Types of chart pattern
Chart patterns fall broadly into three categories: continuation patterns, reversal patterns and bilateral patterns.
- A continuation signals that an ongoing trend will continue
- Reversal chart patterns indicate that a trend may be about to change direction
- Bilateral chart patterns let traders know that the price could move either way – meaning the market is highly volatile
For all of these patterns, you can take a position with CFDs. This is because CFDs enable you to go short as well as long – meaning you can speculate on markets falling as well as rising. You may wish to go short during a bearish reversal or continuation, or long during a bullish reversal or continuation – whether you do so depends on the pattern and the market analysis that you have carried out.
The most important thing to remember when using chart patterns as part of your technical analysis, is that they are not a guarantee that a market will move in that predicted direction – they are merely an indication of what might happen to an asset’s price.
15 stock chart pattern for Trading
1. Ascending triangle
The ascending triangle is a bullish ‘continuation’ chart pattern that signifies a breakout is likely where the triangle lines converge. To draw this pattern, you need to place a horizontal line (the resistance line) on the resistance points and draw an ascending line (the uptrend line) along the support points.
With ascending triangles, the wider the pattern, the more risk/reward it will carry. For narrower patterns, the stop loss becomes smaller; however, the profit target is still based on the most significant part of the pattern. In terms of challenges for traders looking to use this chart, false breakouts are an important consideration. The price movement may fluctuate, moving in and out of the pattern in either direction failing to break the upper resistance level.
Attributes
- Pattern type: Continuation
- Indication: Bullish
- Breakout confirmation: The confirmation for this pattern is a close above the highs on average trading volume.
- Measuring: Subtract the height from the lowest low of the pattern and then added to the breakout level.
- Volume: The volume declines throughout the ascending triangle formation, expanding when the breakout occurs.
2. Descending triangle
Unlike ascending triangles, the descending triangle represents a bearish market downtrend. The support line is horizontal, and the resistance line is descending, signifying the possibility of a downward breakout.
The descending triangle chart pattern also goes by the name of a falling triangle, which allows traders to measure the distance from the start of the pattern, represented by the highest point, all the way to the flat support line. This type of technical analysis identifies a downward trend, which will eventually break through the resistant levels causing the price action to plummet.
Traders look for descending triangles because the pattern indicates a breakdown may be coming. Usually, when a price drop happens, buyers come in the push the price up even higher. However, the descending triangle indicates when there is a lack of buying pressure. Here, sellers begin selling at even lower prices, which suggests a series of lower highs. A breakdown usually occurs when volume is high, and the move following is fast and severe.
Descending triangles are popular because they provide traders with the chance to make considerable profits over a short term. To trade the pattern, technical traders take a bear position after a high-volume break. The price target is usually equal to the entry point minus the vertical distance between drawn lines when the breakdown takes place. The stop loss position is taken at the upper trendline. To profit from a descending triangle, traders have to identify clear breakdowns and avoid false indications. They also have to consider that in case of no breakdowns, the price may test the upper resistance before moving down again to the lower support line.
Attributes
- Pattern type: Continuation
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is a close below the lows on above-average trading volume.
- Measuring: Subtract the height from the highest highs and the low of the pattern and then subtracted from the breakout level.
- Volume: The volume declines throughout the descending triangle formation, expanding on the breakout.
3. Symmetrical triangle
The symmetrical triangle pattern can be either bullish or bearish, depending on the market. In either case, it is normally a continuation pattern, which means the market will usually continue in the same direction as the overall trend once the pattern has formed.
Symmetrical triangles form when the price converges with a series of lower peaks and higher troughs. In the example below, the overall trend is bearish, but the symmetrical triangle shows us that there has been a brief period of upward reversals.
However, if there is no clear trend before the triangle pattern forms, the market could break out in either direction. This makes symmetrical triangles a bilateral pattern – meaning they are best used in volatile markets where there is no clear indication of which way an asset’s price might move. An example of a bilateral symmetrical triangle can be seen below.
These patterns contain two or more swing highs and lows when it comes to price, and investors need to prepare to adjust trend lines with more “swings” to level the playing field. These types of patters can often confuse investors, and they lose volume because they appear to be “aimless,” but for those who know how to look for the breakouts, these patterns can give a great indication of when it buy-in and when to get out.
Attributes
- Pattern type: Continuation or reversal
- Indication: Bullish or bearish
- Breakout confirmation: The confirmation for this pattern is a close above or below the converging trend lines on above-average trading volume.
- Measuring: subtract the height of the lowest low and the highest high of the pattern and then add or subtract this amount to the breakout level depending on which way the breakout moves.
- Volume: The volume declines throughout the ssymmetrical triangle formation, expanding on the breakout.
4. Wedges
Wedges form as an asset’s price movements tighten between two sloping trend lines. There are two types of wedge: rising and falling.
A rising wedge is represented by a trend line caught between two upwardly slanted lines of support and resistance. In this case the line of support is steeper than the resistance line. This pattern generally signals that an asset’s price will eventually decline more permanently – which is demonstrated when it breaks through the support level.
A falling wedge occurs between two downwardly sloping levels. In this case the line of resistance is steeper than the support. A falling wedge is usually indicative that an asset’s price will rise and break through the level of resistance, as shown in the example below.
Both rising and falling wedges are reversal patterns, with rising wedges representing a bearish market and falling wedges being more typical of a bullish market.
A wedge pattern represents a tightening price movement between the support and resistance lines, this can be either a rising wedge or a falling wedge. Unlike the triangle, the wedge doesn’t have a horizontal trend line and is characterised by either two upward trend lines or two downward trend lines.
For a downward wedge, it is thought that the price will break through the resistance and for an upward wedge, the price is hypothesised to break through the support. This means the wedge is a reversal pattern as the breakout is opposite to the general trend.
5. Flag pattern
Flag patterns are similar to the pennant pattern but are often smaller. This technical analysis tool offers traders the benefit of a low-risk investment associated with quick profits. Flags appear all over the price highway, you find them in fast-moving environments, where stocks or indexes moved several points over just a few days, then the price pauses at the flag and then continues forward in the same direction. Of course, eventually, the price reverses directions, so catching the flag at the right point, is critical.
Like the pennant, the flag pattern is based on the market price consolidation of a particular stock. The consolidation will have a narrow range and happen just after a quick upward move. Like the pennant, this pattern has a flag “pole,” which can represent a vertical price fluctuation. These fluctuations can be bearish and bullish, and if you know how to spot these patterns is can give an investor a great advantage.
For bullish patterns, the beginning will start with a sudden spike that can take many investors by surprise and cause a volume frenzy because many are trying to buy in before and during the wave of investment coming in. After a while, the price will peak and form a slight reversal giving the appearance of a tilted rectangle. A breakout occurs when the resistance trend line is broken as the prices begin to rise again and then an explosive price shift as another breakout occurs as the quick trend upward continues.
Bearish patterns are simply the inverted form of the flag pattern, which indicates a panic price drop with an almost vertical initial drop. This time, when the trend line breaks, it will induce panic selling to bring about another downward-pointing leg in the pattern. How sharp the drop is on the flag, in this case, is also the indicator of how bearish this pattern will be, and a wise investor will act accordingly.
Attributes
- Pattern type: Continuation
- Indication: Bullish
- Breakout confirmation: The confirmation for this pattern is when the stock or index closes above the upper trendline across the highs with above-average volume.
- Measuring: take the distance between the previous steep move leading into the flag, and then add that amount to the breakout.
- Volume: The volume declines during the formation, expanding on the breakout.
6. Pennant pattern
Traders pay close attention to pennants and flags when trading. Both are very similar in terms of structure, and it may take some practice before an investor can readily tell the difference between the two. These short-term patterns that last only a two to three weeks in length can be indicated by an initial significant volume move followed by a tapering off period. Then another strong volume increases at the end as the break out occurs.
Investors can use this pattern to help figure out how high the stock will advance by taking the price at the bottom of the “flag pole” in the initial pattern, then waiting until the price consolidates. Once consolidated, the stock or index will break out at a slightly higher level, and if you take the price at the bottom and add it to the break out price, this will give an excellent indication of the future price action for the pattern.
For instance, if you have a stock whose price at the base of the “flag pole” was rs.100 and it rose aggressive to rs.200, then consolidated to 185 where it sits for a while before breaking out at 190. Investors can figure the approximate top for this pattern by taking the initial 100 and adding it to the 190, which gives one a 290 target to hit for the price on this stock for this particular pattern. Typically, investors will use this pattern in conjunction with other indicators to boost their chance at an accurate forecast.
Most traders don’t use pennants on their own but combine them with other technical analysis indicators so that they don’t get faked out or get duped into making a bad trade.
Attributes
- Pattern type: Continuation
- Indication: Bearish or bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close above the upper trend line drawn across the highs for a bullish pennant in a close below the lower trendline for a bearish pendant, with above-average volume.
- Measuring: Take the distance between the previous steep move leading into the pennant, and then add that to the breakout level.
- Volume: The volume declines during the formation, expanding on the breakout.
7. Price Channel
Used by traders for technical analysis-based trading, a price channel is a continuation pattern in which the price bounces between parallel resistance and support lines. The resistance and support lines can run horizontal, sloping downwards (bearish), or upwards (bullish). One of the best things about the price channel pattern is that it doesn’t matter if you’re looking at a daily chart or if your long-term trader, this chart pattern works with any trading time frame.
In the case of a bearish price channel, the trend remains bearish if the price decreases while staying within the descending channels lines. Indications of a change in direction include price not meeting the support level. If the price follows the first indication with a move above the resistance, then this is another signal of change. If the price breaks support, then traders can expect a quick decline in price.
The bullish channel is the opposite of the bearish channel. Here the trendlines run through upward ascending channels while the price action remaining within the channels resistant levels.The trend may change if the price does not reach resistance and breaks below the support. Similarly, a break above the resistance is considered bullish. Price channel analysis is a flexible approach to trading as placement of the two trend lines is up to the trader – they may prefer precise price and line connections or tolerate a margin.
Horizontal channels also exist but are much more challenging to spot for traders that are not actively looking for them. A horizontal channel tends to move sideways in a rectangular formation. Buying and seller pressure hits an equilibrium which forces the price movement sideways through to parallel lines. A new high in the price above the upper resistance level represents a buying opportunity. A new low in a price below the lower support level represents a technical sell signal.
Attributes
- Pattern type: Continuation or reversal
- Indication: Bullish or bearish
- Breakout confirmation: The confirmation for this pattern is when the stock or index closes above the upper trendline across the highs or breaks below the lower trendline with above-average volume.
- Measuring: Take the distance between the previous steep move leading into the final push before the breakout, and then add that amount to the breakout.
- Volume: The volume declines and increases during the formation, but it will expand on the breakout.
8. Head and shoulders
Head and shoulders is a chart pattern in which a large peak has a slightly smaller peak on either side of it. Traders look at head and shoulders patterns to predict a bullish-to-bearish reversal.
Typically, the first and third peak will be smaller than the second, but they will all fall back to the same level of support, otherwise known as the ‘neckline’. Once the third peak has fallen back to the level of support, it is likely that it will breakout into a bearish downtrend.
f you become very good at reading this pattern, you can immediately see the advantage an investor can have. Selling your stock at the point where the “nose” has reached its peak would be an excellent idea, especially if you bought your stock at one of those points at the base of the pattern. Buying at the bottom, then waiting for the “head” to appear, will give you the chance to profit from this market trend before it turns bear. This will provide you with a significant advantage over other investors that might not be able to predict an oncoming downturn in time.
Attributes
- Pattern type: Reversal
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close below the lower trendline drawn horizontally across the intervening low with above-average volume.
- Measuring: Take the distance between the first low to the top of the head, then subtract that amount from the neckline on the breakout.
- Volume: The volume increases during the upward formation of the initial shoulder, then diminishing as the price drops exiting the left shoulder. The volume will then balance out during the creation of the head, only to increases again as the price breaks down below the bottom support level.
9. Double Top
The double top pattern is a twin-peak chart pattern representing a bearish reversal in which the price reaches the same levels twice with a small decline in between the two peaks. A double top pattern usually signals an intermediate or long-term change in trend. When identifying the pattern, traders need to understand that the peaks and troughs don’t have to form a perfect M shape for the pattern to emerge.
Before the pattern starts to emerge, there is a considerable uptrend spanning across many months. The first top is the highest value the trend has reached during the current trend. After the first top, there is usually a price recession of 10 to 20%. This decline in asset value is generally insignificant; however, the fall can sometimes be prolonged due to a decrease in demand.
The movement towards the second peak usually takes place with a low volume. Once the value reaches the first peak level, it resists moving upwards. It may take the price 1-3 months to reach this level. A difference of 3% between the two tops is usually acceptable. After the second peak, there should be an increase in volume accompanied by an accelerated decline.
At this stage, the double top still needs to be confirmed. For this purpose, the trend should break the lowest point between the two peaks accompanied by acceleration and an increase in volume. To set a price target, traders should subtract the distance from the break to top from the breakpoint. If the gap between the peaks is too small, then the pattern may not indicate a longer-term change in asset price.
Attributes
- Pattern type: Reversal
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close below the lower trendline drawn horizontally across the intervening low between the highs with above-average volume.
- Measuring: Take the distance between the two highs in the low, and then subtract that from the breakout level.
- Volume: The volume declines during the formation, expanding on the breakout.
10. Double Bottom
When using technical analysis, the double bottom pattern indicates a long term or intermediate reversal in the overall trend. It is defined by a price drop in a stock or index, preceded by a rebound, then another drop to roughly the same level as the first drop, followed by a more significant rebound. The double bottom pattern resembles the look of a W, where the low is considered the support level.
The prerequisite for a double bottom pattern is a significant downward trend that has been continuing for an extended period – many months. The first bottom or trough of the trend should be the lowest point of the current downward trend. The first trough is followed by 10 to 20% advance and, occasionally, a drawn-out peak.
The second trough follows the advance and finds support from the first low. This formation can take weeks and months to form. The two troughs can be considered a double bottom if the difference between them is within a 3% range.
Volume is the most critical factor for the double bottom pattern. Traders should be sure that there is an acceleration in buying pressure and volume during the advance of the second trough. If volume is not lower on the second leg of this pattern, traders should take notice as the stock or index is at risk of falling below the current resistant level. When the volume increases on the second leg of the pattern, buyers end up rushing in and pushing the stock higher through the confirmation point.
The double bottom reversal is complete when the trend breaks the resistance from the highest point between the two bottoms. Now, the resistance becomes the support. This support is sometimes tested with the first correction.
To set a target, a trader should consider the distance from the resistance breakout to the low points of the bottoms and add those values to the resistance break. With the double bottom pattern, it’s a good idea to trade on patterns that have at least four weeks between the lows.
Attributes
- Pattern type: Reversal
- Indication: Bullish
- Breakout confirmation: The confirmation for this pattern is a close above the upper trendline drawn horizontally across the intervening high between the lows with above-average volume.
- Measuring: Take the distance between the two lows and a high and add it to the breakout level.
- Volume: The volume tends to decline during the formation and increase on the breakout.
11. Triple top
The triple top is a reversal chart pattern featuring three peaks at the same level, making it different from the head and shoulders, which has a more towering middle peak compared to the other two. A breakout from the support follows the three peaks. The area of the peaks is the resistance level in the pattern.
Before the three peaks emerge, the price experiences an uptrend. After the formation of the first peak, the price undergoes a swing lower. The peaks themselves are well spaced and are reasonably equal in height. The triple top development includes a decline in overall volume with occasional increases when the price reaches the high points. After the third peak, the volume expands during the drop and at the support level.
Confirmation of the triple top pattern happens when the support breaks. The support level is the lowest of the swing lows. The support now acts as a possible resistance level that is often tested with a reaction rally, a rally that stops before it reaches the point from where the decline started. The price target is the distance from the support line to the high points minus the support break.
A triple top reversal pattern usually takes three to six months to form. Throughout this development, the pattern can take the shape of a double top and other patterns as well. Traders also combine the triple top with other indicators, such as MACD, to confirm the bearish crossover after the final high.
Attributes
- Pattern type: Reversal
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close below the lower trendline drawn horizontally across the intervening low with above-average volume.
- Measuring: Take the distance between the low to the top of the two highs, then subtract that amount from the breakout level.
- Volume: The volume increases during the formation and then increases below the bottom support level.
12. Triple bottom
The triple bottom reversal pattern has three roughly equal lows and indicates an opportunity to take a bullish position. Before the triple bottom occurs, the bears are usually in control of the market, forming a prolonged downtrend. The first bottom does not indicate anything out of the ordinary. Still, the second and third bottoms show a change in direction where buyers (bulls) may push the price action higher after the price breaks through the resistance.
As with other reversal patterns, there should be an existing trend – a current downward trend in this case. Similar to the triple top pattern, the three bottoms should be nearly equal in size and have sufficient space between them. There should be a clear indication of a drop in volume leading into the pattern and an increase in volume on the advance and at the resistance break. Finally, the price should break through the resistance level, which is at the highest point of the highs present between the bottoms. The price may test the new support level it has found. The price target is calculated as the value from the resistance break to the base points plus the resistance break.
A limitation of the triple bottom is that it does offer a reasonable risk and reward equation. Traders should consider a triple bottom as a neutral pattern until they can confirm a breakout. Like the triple top reversal pattern, a triple bottom takes typically three to six months to form.
Attributes
- Pattern type: Reversal
- Indication: Bullish
- Breakout confirmation: The confirmation for this pattern is a close above the upper trendline with above-average volume.
- Measuring: Take the distance between the first high and the low of the head and then add it to the upper resistance level on the breakout.
- Volume: The volume tends to be low, heading into the formation and increase on the breakout.
13. Rounding top or bottom
A rounding bottom or cup usually indicates a bullish upward trend, whereas a rounding top usually indicates a bearish downward trend. Traders can buy at the middle of the U shape, capitalising on the trend that follows as it breaks through the resistance levels.
Rounding bottom pattern sometimes knows as a “saucer bottom” pattern, is known for being able to predict long term upward trend. Very similar to the cup and handle pattern, only without the bother of a temporary downward trend that makes up the “handle.” The pattern is a long-term reversal pattern that is best applied to weekly charts, representing a consolidation. That turns from bearish to bullish.
This rounding bottom pattern can be spotted at the end of depressingly long downward trends. The timeframe for this pattern can be weeks, months, or even years in length and is considered to be one of the more rarified patterns to form in the marketplace. Most of the time, this pattern indicates that the long downward trend, often caused by an excess of stock supplies, is coming to an end as investors start to buy in at low price points reversing the downward movement. Once this starts, it typically increases demand and pushes up the stock price.
This allows the stock to “break out” and begin a long-lasting and positive reversal that investors can take advantage of if they choose to be one of those who buy low and are willing to sit on the stock for a while until it tops out again. This is because the length of time for recovery can be varied, and may take a long time to find its peak. Investors should prepare for this lengthy-time period and have patience while the price continues to build.
Attributes
- Pattern type: Continuation
- Indication: Bullish
- Breakout confirmation: When there is above-average volume, and the stock closes above the lip of the rounding bottom.
- Measuring: The price target is obtained by measuring the distance between the height of the highest high and the lowest low and then adding that to the breakout level.
- Volume: There is an increase in volume into the shape of the rounding bottom, balanced during the middle, with raising volume towards the right side, which continues on the breakout.
14. Cup and handle
The cup and handle pattern is a bullish continuation pattern that is used to show a period of bearish market sentiment before the overall trend finally continues in a bullish motion. The cup appears similar to a rounding bottom chart pattern, and the handle is similar to a wedge pattern – which is explained in the next section.
Following the rounding bottom, the price of an asset will likely enter a temporary retracement, which is known as the handle because this retracement is confined to two parallel lines on the price graph. The asset will eventually reverse out of the handle and continue with the overall bullish trend.
William O’Neil initially recognized this popular stock chart pattern in 1988. To identify the cup and handle formation O’Neil claims the handle should extend no longer than one-fifth to one-quarter the length of the cup. The handle will remain close to the prior highs, which will squeeze out the short-sellers and cause new buyers to enter the market.
The formation is usually initiated by low-trading volume, followed by high-volume as the left lip forms, then falling volume near the bottom of the cup, which then kicks off to rising volume towards the right lip and on the breakout. This process can last anywhere from a few minutes to sixty-five weeks, initiated by a downward price fluctuation followed by a period of stabilization, then a rally that brings the prices back up almost or equal to the previous level before the plummet.
Once this happens, the the cup advances and forms a U, and the price drifts downward slightly forming the handle.
The handle has to be smaller than the cup and should only indicate a slight downward trend within the trading range – not one that goes lower than one-third of the way into the cup. Investors who see a similar pattern where the handle goes deeper might want to make efforts to avoid it.
However, when the handle is of proper proportions to the side of the cup, a breakout that goes higher than the handle is an indication of a rise in price. Furthermore, it is essential to note that this isn’t always the case, and investors should use some measures to mitigate losses when putting money into these types of patterns.
Attributes
- Pattern type: Continuation
- Indication: Bullish
- Breakout confirmation: When there is above-average volume, and the stock closes above the upper trendline drawn from the top of the handle.
- Measuring: The price target is obtained by measuring the distance from right lip to the bottom of the cup and then adding that to the price level of the right lip.
- Volume: Increased volume is typical following the shape of the cup, with higher volume as the left lip forms, decreasing volume as the bottom of the cup forms, and raising volume towards the right lip which continues on to the breakout.
15. Bump and rum pattern
If you are contemplating purchasing stock in a company, what if you had the means to predict the purchase price of that stock would be less tomorrow… It’s almost like a superpower. But how does one predict a stock price will fall? That’s the power of the bump and run reversal pattern.
The bump and run reversal pattern appears after a fast and large price hike due to excessive speculation. The pattern starts with a lead-in phase in which the prices advance normally without any signs of excessive speculation. The trend line during the lead-in phase is moderately steep.
The second phase of the pattern is the bump phase, in which prices increase rapidly compared to the first phase. During this phase, the trend line becomes at least 50% steeper compared to the lead-in trendline. Traders should validate the bump pattern by checking the max—height of the bump in relation to the lead-in trendline. The distance from the highest point of the bump to the lead-in trendline should be two times (or more) the distance from the highest high in the lead-in phase to the lead-in line.
After prices reached their peak and start to decline towards the trend line, the chart begins to show the right side of the bump. Volume expands after the advance forms on the left side of the bump. The run phase starts when prices reach the lead-in trendline.
After passing the trendline, sometimes the price also retracts to the trendline, which is now also the resistance level. The bump and run reversal pattern can be used for all types of trading, from daily, to weekly, to monthly, with the understanding that the movement is unsustainable for a longer period.
Attributes
- Pattern type: Nondirectional
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is a close below the lower trendline drawn across the lows, during the lead-in phase, with above-average trading volume.
- Measuring: The price target is the lowest point of the lead-in phase
- Volume: The volume usually is high at the beginning of the phase and decreases throughout the pattern.
