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12 Types of Chart Patterns That You Should Know          

12 Types of Chart Patterns That You Should Know

12 Types of Chart Patterns That You Should Know
By Arjun Arjun Remesh | Reviewed by Shivam Shivam Gaba | Updated on September 1, 2023

A chart pattern is a pattern that appears on a price chart of a financial instrument, such as a stock, commodity, or currency. The chart pattern is  also known as price patterns. The prices are plotted on a price pattern. Chart patterns help in the identification of the trends in the market. The chart patterns depict the time-dependent movement of the market trends. Chart patterns represent price movements that help traders gain valuable insights into market trends and decide about buying, selling, or holding an asset. Chart patterns help in the identification of entry and exit points in a market. There are twelve types of chart patterns. They are the pennant, flag, double top, double bottom, rounding bottom, cup and handle etc. This article throws light on the different chart patterns and how the changing chart trends affect the trading options.

1. Pennant

The pennant chart pattern is a continuation pattern. The pennant chart pattern occurs when there is a sudden stop in the price movement during a strong uptrend or downtrend. Two converging trend lines that resemble a triangle form the pennant chart pattern.

Pennant
Pennant

Traders can use the pennant pattern as a technical analysis tool to identify potential entry and exit points in the market. For example, the trader  chooses to enter a long position when the price breaks above the upper trendline, or a short position when the price breaks below the lower trendline,  if they identify a pennant pattern in the trading asset.

Traders should also be aware of the limitations of chart patterns, such as the potential for false or failed breakouts, and adjust their trading strategies accordingly.

2. Flag

The flag chart pattern occurs during a strong uptrend or downtrend in the market. The flag chart pattern depends on the flagpole ( sharp price movements ) and flag ( period of consolidation ). The flag pattern signals that the market is taking a brief pause before continuing in the same direction as the previous trend. 

Flag
Flag

The flag pattern is a tool to identify entry and exit points in the market. For example, A trader chooses to enter a long position when the price breaks above the resistance level of the flag, or a short position when the price breaks below the support level of the flag.

3. Head and shoulders

The head and shoulders chart pattern is a bearish reversal pattern that occurs after an uptrend in the market. The head and shoulders chart pattern comprises three peaks. The middle peak is the highest, and two lower peaks on either side. The pattern gets complete when the price breaks below the support level that connects the two troughs between the peaks.

Head and shoulders
Head and shoulders

The head and shoulders pattern is a signal that the buying pressure in the market is weakening and that the trend will soon reverse. Potential trend reversal happens when the price breaks below the support level that connects the two troughs.

Traders can use the head and shoulders pattern as a technical analysis tool to identify potential entry and exit points in the market. For example, the head and shoulder pattern identification helps traders choose to enter a short position when the price breaks below the support level, or exit a long position to minimize potential losses.

4. Double top

Double top
Double top

The double-top chart pattern is a bearish reversal pattern that occurs after an uptrend in the market. It consists of two peaks that are roughly equal in height, with a trough in between them. The pattern gets complete when the price breaks below the support level established during the trough. The double-top pattern is a signal that the buying pressure in the market is weakening and that the trend will soon reverse. 

5. Double bottom

Double bottom
Double bottom

The double-bottom chart pattern is a bullish reversal pattern that occurs after a downtrend in the market. It is formed by two distinct troughs, with a peak in between, that are roughly equal in price and distance from the peak. The pattern gets complete when the price breaks above the resistance level that connects the two peaks between the troughs. The double-bottom pattern is a signal that the selling pressure in the market is weakening and that the trend  soon reverses. 

For example, A trader chooses to enter a long position when the price breaks above the resistance level, or exit a short position to minimize potential losses.

6. Rounding bottom

Rounding bottom
Rounding bottom

The rounding bottom chart pattern is a bullish reversal pattern that occurs after a downtrend in the market. It is formed by a long-term downward trend, followed by a period of consolidation where the price moves in a rounded shape. The pattern gets complete when the price breaks above the resistance level that connects the highs of the rounding bottom.

The rounding bottom pattern is a signal that the selling pressure in the market is weakening and that the trend  soon reverses.

7. Cup and handle

Cup and handle
Cup and handle

The cup and handle chart pattern is a bullish continuation pattern that occurs during an uptrend in the market. It is a long-term upward trend, followed by a cup-shaped consolidation period, and then a short consolidation period in the shape of a handle. The pattern gets complete when the price breaks above the resistance level that connects the highs of the handle and the cup. The cup and handle pattern is a signal that the buying pressure in the market is strong and that the trend continues after a brief pause. 

8. Wedges

Wedges
Rising and Falling Wedges

A wedge chart pattern is a technical analysis pattern that is either bullish or bearish depending on its orientation. There are two types of wedge patterns: rising wedges and falling wedges.

A rising wedge forms when the price is moving up and the highs and lows of the price action converge to form a triangle or wedge shape. The price eventually breaks down below the lower trendline of the wedge, indicating a potential reversal or bearish signal.

A falling wedge occurs when the price is moving down, and the highs and lows of the price action converge to form a triangle or wedge shape. The price eventually breaks up above the upper trendline of the wedge, indicating a potential reversal or bullish signal. Wedges are continuation patterns and the price continues in the direction of the previous trend after the pattern is complete. 

9. Gaps

A gap in a chart occurs when there is a significant difference between the closing price of an asset on one day and the opening price on the following day. It creates an empty space, or “gap,” on the chart. A gap can occur in either direction, creating two types of gaps: a “breakaway gap” and a “continuation gap”.

Gaps
Gaps

A breakaway gap occurs when the price of an asset breaks through a support or resistance level and continues to move in the same direction. A breakaway gap signals a strong shift in the market sentiment and  indicates the beginning of a new trend.

A continuation gap, a type of gap, occurs in the middle of an established trend and signals a continuation of that trend. Continuation gaps can occur when there is a sudden influx of buying or selling pressure in the market, leading to a significant price movement.

10. Ascending triangle

An ascending triangle is a bullish chart pattern used in technical analysis to identify potential trading opportunities. It is a horizontal trendline that connects a series of price highs and an upward-sloping trendline that connects a series of higher lows. The resulting pattern looks like a triangle with a flat top and rising bottom. The triangle breaks out above the horizontal resistance level, indicating a potential continuation of the uptrend when the price approaches the apex of the triangle. Traders often use this breakout as a signal to enter a long position, with a stop loss set below the horizontal support level.

Ascending triangle
Ascending triangle

The ascending triangle pattern is often used in conjunction with other technical analysis tools, such as volume indicators and oscillators, to confirm signals and minimize risk. It’s important to note that triangle patterns are not a guarantee of future market movements, and traders should be aware of the potential for false or failed breakouts.

11. Descending triangle

A descending triangle is a bearish chart pattern used in technical analysis to identify potential trading opportunities. It is a horizontal trendline that connects a series of price lows and a downward-sloping trendline that connects a series of lower highs. The resulting pattern looks like a triangle with a flat bottom and a falling top.

Descending triangle
Descending triangle

The pattern breaks down below the horizontal support level, indicating a potential continuation of the downtrend when the price approaches the apex of the triangle. Traders often use this breakout as a signal to enter a short position, with a stop loss set above the horizontal resistance level. The descending triangle pattern is often used in conjunction with other technical analysis tools, such as volume indicators and oscillators, to confirm signals and minimize risk. 

12. Symmetrical triangle

A symmetrical triangle chart pattern is a technical analysis pattern that occurs when the price of an asset consolidates within a triangle pattern. The pattern consists of two trend lines that converge towards each other, with the upper trend line connecting the series of lower highs and the lower trend line connecting the series of higher lows.

Symmetrical triangle
Symmetrical triangle

The symmetrical triangle pattern typically signifies a period of indecision in the market, with buyers and sellers in equilibrium and the asset price experiencing a period of consolidation. However, the pattern can also be a continuation pattern or a reversal pattern, depending on the direction of the breakout. The trader after understanding the bullish signal (the price breaks out of the upper trend line) enters the long positions. Short position entry happens in bearish markets where the price breaks out of the lower trend line.

What are Chart Patterns?

Chart patterns are the technical identification tools used to identify the potential trading opportunity. The patterns depend on the way prices move over time. They can provide clues as to the future direction of prices, as they often indicate that buyers or sellers are gaining or losing control of the market.

There are twelve types of chart patterns, including trend reversal patterns, such as head and shoulders, and continuation patterns, such as flags and pennants. A clear understanding of these patterns helps traders decide when to buy or sell an asset.

What is Significance of Chart Patterns for Technical Analysis?

Chart patterns represent market sentiment and potential future price movements that help traders gain valuable insights into market trends and decide about buying, selling, or holding an asset. The potential entry and exit points identification is simple using a chart pattern. For example, a bullish chart pattern  signals that it’s a good time to buy a particular asset, while a bearish chart pattern  indicates that it’s time to sell or take a short position. Chart patterns can also help traders to set stop-loss orders and limit their risk exposure.

How Does the Chart Patterns Work?

Chart patterns work based on the price movements of an asset following predictable patterns. Traders identify common patterns that have occurred in the past and  occur in the future by analyzing the historical price movements of an asset.

Traders use technical analysis tools to analyse different types of candlesticks patterns to determine the potential direction of the price movement after chart pattern identification.  For example, a head and shoulders pattern  indicates that a market is about to reverse from an uptrend to a downtrend. Traders  use this information to take a short position in the asset.

It’s important to note that chart patterns are in conjunction with other technical and fundamental analysis tools. Additionally, market conditions can change quickly, so traders must reconstruct their strategies accordingly.

Traders should abide by the following six steps, to read and understand a chart pattern :

  1. Pattern identification: Look at the price chart and try to identify any recognizable chart pattern. It includes some common chart patterns like head and shoulders, double top/bottom, triangle, rectangle, and wedge.
  2. Pattern analysis: Analyze the pattern by examining its key components. For example, with a head and shoulders pattern, you would look for the left shoulder, head, and right shoulder, as well as the neckline that connects the two shoulders.
  3. Determine the direction: Determine the direction of the pattern, whether it is a bullish or bearish pattern. For example, a head and shoulders pattern is a bearish reversal pattern, while a double bottom pattern is a bullish reversal pattern.
  4. Pattern confirmation: Look for confirmation of the pattern by checking other technical indicators, such as volume, moving averages, and trend lines. 
  5. Set a price target: Once you’ve confirmed the pattern, set a price target based on the pattern’s predicted price movement. This helps in identifying the entry and exit points.
  6. Consider the overall market context: Consider the overall market context and any other news or events that could impact the price of the security. 

The above mentioned steps help in understanding the chart patterns to a greater extent.  Gaining an understanding about trend lines also helps in the proper understanding of the chart patterns. A trendline is a straight line that connects two or more price points on a chart. It is used to identify the direction of a trend and is used as a tool to help traders and investors make informed trading decisions. The trendline should connect the higher lows to make an uptrend, and it should connect the lower highs for a downtrend. There are three main types of trendlines: uptrend lines, downtrend lines, and horizontal or support/resistance lines. Trendlines are significant because they can help traders and investors identify potential buy and sell signals. A break below the trendline acts as a signal, a potential reversal and a sell signal for an uptrend. A break above the trendline leads to a buy signal for a downtrend. 

What are the Benefits of the Chart Patterns?

Chart patterns are a valuable tool for traders and investors who want to gain insight into market trends and potential trading opportunities. The five major benefits of chart patterns include:

  1. Identifying potential trading opportunities: Chart patterns can provide traders with insight into potential trading opportunities by identifying price trends and patterns. It helps in capitalizing before the market moves in a different direction.
  2. Risk minimisation: Traders can use chart patterns to set stop-loss orders and minimize their risk exposure by identifying key levels of support and resistance.
  3. Saving time: Chart patterns provide a quick and easy way for traders to analyze the markets and identify potential trading opportunities. This can save traders time and help them make more efficient trading decisions.
  4. Providing clear entry and exit points: Chart patterns help traders make more informed decisions and minimize their risk exposure.
  5. Improving accuracy: Traders can improve the accuracy of their trading decisions by using chart patterns in conjunction with other technical and fundamental analysis tools.

Chart patterns help in  improving accuracy, providing clear entry and exit points, time saving and risk minimising through which the profit generation can be improved.

What are the Limitations of the Chart Patterns?

Chart patterns can be a useful tool for technical analysis but have some limitations. It includes the below mentioned five limitations:

  1. False signals: Chart patterns are not always accurate and can sometimes provide false signals. It can lead to traders making incorrect trading decisions and losing money.
  2. Subjectivity: Different traders  interpret the same pattern differently. 
  3. Lack of fundamental analysis: Chart patterns only provide information about price movements and do not take into account fundamental factors that can affect the markets, such as economic data and news events.
  4. Limited time frame: Chart patterns depend on historical data and do not take into account future events that  affect the markets. 
  5. Over-reliance: Traders who rely too heavily on chart patterns  overlook other important technical and fundamental analysis tools that can help them make more informed trading decisions.

Proper understanding of the limitations and developing effective solutions for tackling the limitations helps in enlarging the profit margin. 

What are the Techniques for Trading Using the Chart Patterns?

Trading using chart patterns involves identifying patterns in price charts that indicate potential trading opportunities. The traders use the following six techniques :

  1. Identification: The first step is to identify the pattern on the chart. Common chart patterns include triangles, rectangles, head and shoulders, and double tops or bottoms.
  2. Confirmation: Check whether the pattern is valid. It involves looking for certain price levels or indicators that confirm the pattern.
  3. Setting entry and exit points: Traders set entry and exit points based on the pattern. 
  4. Risk management: Traders must manage risk by setting stop-loss orders to limit potential losses.
  5. Trade monitoring: Traders monitor the trade to see if the pattern is playing out as expected. 
  6. Adjusting the strategy: Traders  adjust their strategy based on changing market conditions or if the pattern is not producing the desired results. 

The traders can ensure maximum output by abiding strictly to the above mentioned techniques. Thus identification, confirmation, setting entry and exit points, risk management, trade monitoring  and strategy adjustments helps in identifying the potential opportunities. 

What Does Entry Stops Mean?

Entry stops refer to an order placed by a trader to enter a trade at a specific price level, which is triggered when the market price reaches that level. Entry stops are part of a trading strategy to enter a market at a favorable price level, either to take advantage of an expected price trend or to minimize potential losses in case of a price reversal.

For example, a trader who expects the price of a stock to increase  places an entry-stop order to buy the stock at a price level above the current market price. The entry stop order will be triggered, and the trader will enter a long position in the market, if the market price reaches the expected level. It’s important to note that entry-stop execution orders do not occur at the exact price level specified in the order, as the market price  moves quickly and experiences slippage. 

What Does False and Failed Breakout Mean?

A false breakout occurs when the asset price moves above or below a significant support level but then quickly reverses and moves back in the opposite direction. 

A failed breakout occurs when the price of an asset moves above or below a significant level of support  but then fails to reverse and instead moves back in the opposite direction. 

Both false and failed breakouts can lead to losses or missed opportunities. Traders can use technical and fundamental analysis tools to help confirm breakout signals and minimize the risk of false or failed breakouts.

What Does Protective Stops Mean?

Protective stops refer to an order placed by a trader to exit a trade at a specific price level in order to limit potential losses. Protective stops are an important risk management tool used to protect trading capital from excessive losses in case the market moves against them.

A protective stop order essentially sets a limit on the amount of money the traders are willing to lose on a trade. The trader’s position is automatically closed, and they exit the trade with a limited loss when the market price reaches the protective stop level.

How is Trading False Breakouts Using Protective Stops?

Trading false breakouts using protective stops involves placing a stop-loss order at a specific price level to limit potential losses. 

Trading false breakouts without protective stops: A traders look for instances where the price of an asset briefly moves above or below a significant level of support but then quickly reverses and moves back in the opposite direction. These false breakouts can trap traders who enter positions in the breakout direction, leading to losses.

Trading false breakouts using protective stops : A trader enters a position in the opposite direction of the breakout and places a stop-loss order above or below the breakout level, depending on whether they are entering a long or short position. The stop-loss order acts as a protective stop, limiting potential losses in case the market moves against the trader. Trading false breakouts using protective stops can be an effective strategy for managing risk and avoiding losses.

How is Retracements Done

Retracements are a technical analysis tool used to identify potential levels of support or resistance in the market. Retracements are done by measuring the percentage of the previous price move and then identifying potential support or resistance levels at certain percentage levels.

Traders must first identify a previous price move to be analyzed in order to perform a retracement. It can be an uptrend or a downtrend and should be a significant move in price.

Traders can use a Fibonacci retracement tool to calculate potential support or resistance levels. The Fibonacci retracement tool measures the percentage of the previous price move retraced, using key Fibonacci levels of 23.6%, 38.2%, 50%, 61.8%, and 100%.

Traders can then identify potential support or resistance levels at the Fibonacci levels, as these levels are often areas where price  stalls or reverses. For example, potential support at the 50% Fibonacci level occurs if a trader identifies a previous uptrend and measures a retracement of 50%.

How Important are Chart Patterns for Technical Analysis?

Chart patterns are an important tool for technical analysis. Chart patterns help to identify key levels of support and resistance, as well as potential price trends and price reversals.

Traders can gain insight into the behavior of the market and make informed trading decisions by chart pattern analysis. It’s important to note that chart patterns should not be relied on exclusively for trading decisions and should be used in conjunction with other technical analysis and fundamental analysis tools to confirm signals and minimize risk. Traders should also be aware of the limitations of chart patterns, such as the potential for false or failed breakouts, and should adjust their trading strategies accordingly.

Are Chart Patterns One of the Foundations of Technical Analysis?

Yes, chart patterns are one of the foundations of technical analysis. Technical analysis is a method of evaluating the behavior of the market by analyzing statistical trends, such as charts and other indicators, to identify potential trading opportunities.

Chart patterns depend on the price movements of an asset over time and are a key component of technical analysis. Traders can gain insight into the behavior of the market and identify potential trends, reversals, and trading opportunities, by analyzing chart patterns. Chart patterns are often used in conjunction with other technical analysis tools, such as technical indicators, to confirm signals and minimize risk. 

Do Chart Patterns Predict the Future Market?

No, Chart patterns do not predict the future market with certainty. Chart patterns provide insights into potential market trends and help them make informed trading decisions based on historical market behavior. It depends on the price movements of an asset over time and can provide valuable information about potential support and resistance levels. Traders can identify potential trading opportunities and manage their risk by analyzing chart patterns. Chart patterns should be used in conjunction with other technical and fundamental analysis tools to confirm signals and minimize risk. 

Does Head and Shoulder Indicate Near the End of the Upward Trend?

Yes, the head and shoulders pattern can indicate the near end of an upward trend in the market. The head and shoulders pattern is a bearish reversal pattern that forms after an uptrend and can signal a potential trend reversal.

The head and shoulders pattern consists of three peaks, with the middle peak, or “head,” higher than the other two, called the “shoulders.” The pattern gets completed when the price breaks below the “neckline,” which is a support level that connects the two low points between the shoulders.

The head and shoulders pattern forms after an uptrend, indicating the weakening buying pressure and that the sellers  soon take control of the market. The break below the neckline confirms the trend reversal, as the price  continues to decline.

It is important to have a solid understanding of chart patterns and how they relate to market conditions before trading. Chart patterns cannot directly throw light on the market structure. The proper use of technical analysis tools is also important in chart pattern analysis. A proper understanding of the market structure and investment strategies helps in facing problems before diving deep into the world of charts.

Arjun
Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam
Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.

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