18 Essential Chart Patterns Every Trader Must Know

Chart patterns are among the fundamental tools in a technician’s toolkit. Chart patterns study decades of historical price data across diverse markets, and analysts have identified recurring formations that foreshadow future price movements with high probabilities. So what are chart patterns? Chart patterns refer to recognizable formations that emerge from security price data over time. They provide technical traders with valuable insights into market psychology and supply/demand dynamics. By studying these repetitive visual structures, analysts intuitively gauge potential trend changes and formulate higher probability trading strategies.

Richard Schabacker is widely credited as the inventor of chart patterns through his pioneering work defining and documenting them. In his 1932 book “Technical Analysis and Stock Market Profits”, Schabacker laid the foundations for modern pattern analysis and identified several important reversal and continuation formations.

Chart patterns fall into two main categories – reversal and continuation formations. Within continuation patterns are reliable setups like ascending and descending triangles, bull and bear flags, and pennants – all of which signal the prevailing trend is likely to carry on after a period of consolidation. Reversal patterns such as head and shoulders tops, double tops and bottoms, and triple tops and bottoms signify an emerging change in the directional bias. Bilateral patterns like rectangles and diamonds could prompt breakouts or breakdowns depending on the context.

Here is an essential video on chart patterns from Strike.

1. Pennant

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

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.

Pennants are direct representations of pause or consolidation. During this phase, manipulation of prices is achieved that creates sufficient liquidity for resuming the preceding trend. A trader thus has to plot appropriate pennants and thereby enter trades only after this consolidation pattern is broken with sufficient momentum.

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.

Flags are direct representations of pause or consolidation. During this phase, manipulation of prices is achieved that creates sufficient liquidity for resuming the preceding trend. A trader thus has to plot appropriate flags and thereby enter trades only after this consolidation pattern is broken with sufficient momentum. A confirmation is gathered if retest of the broken trendline is achieved. Flags are one of the most common patterns that can be spotted. 

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.

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.

As head and shoulder patterns are classic patterns that traders look out for. In today’s era of markets, the potential of manipulation has thereby increased. Smart traders thus often wait for extra confirmations before trusting head and shoulder. 

The image uploaded below is a classic Inverted Head and Shoulder. This inverted head and shoulder is a bullish reversal pattern that is opposite price action pattern of the Head and Shoulder that is usually a bearish reversal pattern.

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

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.

Double Top’s are one of the most relied patterns that exist out there. Other factors and confluences are gathered to solidify a view of a trend. Retest of the break of the neckline is a prominent confirmation alongside other confluences. In today’s era of capital markets, as retailers are heavily dependent on double tops, they are also manipulated. The neckline breaks, the retails enter short and the price totally reverses and targets the stoplosses of these retail shorters. 

Double Top’s are also reliable on Lower Time Frames thus scalpers and day traders are really dependent on quality double tops.

The strength of the double top is considered stronger when the second top is a Lower High than the previous top.

5. 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.

Double Bottom’s are one of the most relied patterns that exist out there. Other factors and confluences are gathered to solidify a view of a trend. Retest of the break of the neckline is a prominent confirmation alongside other confluences. In today’s era of capital markets, as retailers are heavily dependent on double bottoms, they are also manipulated. The neckline breaks, the retails enter longs and the price totally reverses and targets the stoplosses of these retail longers.

Double bottoms are also reliable on Lower Time Frames thus scalpers and day traders are really dependent on quality double bottoms.

The strength of the double bottom is considered stronger when the second bottom is a Higher Low than the previous bottom. 

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

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 can be assumed as a slow change in psychology of traders and big players. The shorting positions are lowered and steadily long positions are built. These patterns can be spotted on lower time frames but can be more reliable on Higher Time Frames. 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

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. 

This pattern is a Higher Time Frame based. Swing trader’s most favorite pattern. This pattern requires an abundance of patience. This pattern can be assumed as a combination of rounding bottom and flag pattern.

8. 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.

In a bullish market, falling wedges may appear in an uptrend, where the trend continuation is followed by an uptrend and a breakout of wedge type consolidation. Falling wedges may also appear in a downtrend, where the main trend is bullish and during a minor downtrend, the trend continuation is followed by this minor downtrend and a breakout of a wedge type consolidation.

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. Rising wedges occur at the end of an uptrend to change the momentum towards downside and it may also appear as a consolidation before the trend continuation (bearish).

Wedge pattern is highly manipulated in today’s era. A quality wedge should be observed to avoid manipulation. It is based on a hyper strong trend. Sometimes, the RSI of the script can be in an overbought/oversold area and still manage to trend higher after the break of the wedges in case of a one sided move. Traders often try to avoid wedges to trade in Lower Time Frames due to low probability of a one sided move in a day’s range. 

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”.

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.

Gap Filling is also a popular strategy amongst the gaps. After the gap is formed, a bet based on probability of a trend and other technical tools and indicators are observed to speculate that the gap may get filled. 

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.

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 because of the increase in manipulation in today’s era as more and more retail public try to find triangles for trading opportunities, and traders should be aware of the potential for false or failed breakouts.

Traders often in hastiness plot incorrect trendline support, a proper 30-45 degree trendline is known to be most appropriate one connecting minimum or 2-3 Higher Lows followed by a proper uptrend and consolidation within this trendline and the horizontal resistance above.

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.

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.

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.

13. Triple top & bottom

The triple top and triple bottom are reversal chart patterns that signal a potential change in the previous trend. A triple top forms after an uptrend as the price reaches the same peak level three times but fails to break above it. This shows buyers are losing momentum and signals a potential reversal. A triple bottom forms after a downtrend as price reaches the same trough level three times but fails to break below it, indicating waning selling pressure and a potential uptrend reversal.

These patterns take shape over an extended period as each peak or trough is formed. Volume tends to decline on each successive peak or trough, highlighting the weakening conviction behind the move. Price breaking above the ridge between the troughs for a triple bottom or below the valley between the peaks for a triple top indicates the triple bottom’s trigger point. This break signals buyers or sellers have gained control and the reversal is underway. 

Traders attempt to enter on the breakout in the opposite direction of the previous trend. Initial profit targets are calculated by measuring the height of the pattern and projecting it from the breakout point. Stop losses are placed on the opposite side to control potential loss if the reversal fails. 

The triple top and bottom were first popularised by chartists in the early 20th century. They are important tools for identifying trend reversals and planning entry points when trading price swings on the stock market.

14. Bullish and Bearish Rectangles

The bullish rectangle appears during an uptrend when price becomes bound between a horizontal resistance line and an ascending support trendline. This shows consolidation as buyers and sellers reach equilibrium after a rally. Volume typically declines within the pattern as the trading range tightens. An upside breakout signals the uptrend will continue.

The bearish rectangle forms during a downtrend when price becomes range-bound between horizontal support and descending resistance. This signals consolidation after a prior decline. Volume also declines as the pattern evolves. A downside breakout indicates the downtrend will resume.

Rectangles take shape over 1-3 months as the bounds of the range tighten. Traders look to enter new long positions on an upside breakout of a bullish rectangle, or initiate new short trades on a bearish rectangle downside breakout. Profit targets are set at the height of the rectangle projected from the breakout point. Stop losses are placed on the opposite side of breakout to define risk.

The rectangle patterns were first documented in the early 20th century by Charles Dow and other technical analysis pioneers. They believed periods of consolidation led to powerful breakouts. Rectangles are important for identifying continuations of existing trends in stock chart analysis.

15. Diamond Top and Bottom

The diamond top is a bearish reversal pattern that forms after an uptrend as the price reaches a new high and then retreats back down. As sellers take over, the pattern forms with higher troughs and lower peaks, creating a diamond shape. The price breaking below the lowest dip indicates the reversal of the uptrend and is the trigger point.

Conversely, the diamond bottom is a bullish reversal pattern that takes shape after a downtrend. The price drops to a new low and then rallies back up, with lower troughs and higher peaks forming the diamond shape. The indication that an uptrend has replaced the previous downward trend is given by a price break above the highest peak.

Diamond tops and bottoms appear over 1-3 months as the pattern takes shape. Traders look to enter short trades on a breakdown below a diamond top, or long trades on an upside breakout from a diamond bottom. Profit targets are set using the height of the pattern projected from the breakout point. Stop losses are placed on the opposite side of the breakout.

These diamond reversal patterns were first introduced in the 1930s by forex chartists and later adopted by stock technicians. They highlight areas where supply and demand conditions are shifting from bulls to bears or vice versa. Diamonds help traders identify high-probability reversal points.

16. Broadening Top and Bottom

A broadening top and bottom is a technical analysis chart pattern that forms as the price swings widen between two diverging trendlines. It is considered a reversal pattern, signalling a transition from an uptrend to a downtrend on a broadening top, or a downtrend to an uptrend on a broadening bottom.  

Broadening tops and bottoms form as volatility increases, with price making progressively higher highs and lower lows. Trading volume also tends to increase as the pattern develops. These patterns last from a few weeks to several months before a reversal occurs. The longer the time frame, the more significant the expected trend change.

A broadening bottom or broadening top signalling the conclusion of the preceding trend, respectively, occurs when price breaks through resistance or support. Technical traders will look to enter short trades on the breakdown of a broadening top, or go long on the upside breakout from a broadening bottom. 

Initial profit targets are set at the lowest low or highest high of the pattern. Stop losses are placed on the other side of the breakdown/breakout point to define risk. The increased volatility in these patterns sometimes lead to fast moves and extended trends once prices break out.

Broadening tops and bottoms were first popularised in technical analysis in the 1930s. They are used for identifying shifts in the prevailing trend on all time frames. 

17. Pipe Bottom and Pipe Top

The pipe bottom and pipe top are short-term reversal chart patterns that signify a transition from an uptrend to a downtrend, or vice versa. They form as prices consolidate in an unusually tight trading range after a large advance or decline. The tight range resembles tshape of a pipe on the chart.

Pipe bottoms and tops develop due to the battle between buyers and sellers seeking control following an overbought or oversold move. The tight trading range indicates indecision in the market as it cools off from unsustainable buying or selling pressure.

Prices breaking out of the narrow range in the opposite direction of the prior trend indicates the completion of these patterns. Technical analysts look to go short on a downside break of a pipe top, or long on an upside break of a pipe bottom. 

Initial profit targets are set at the height of the previous move. Stop losses are placed just outside the opposite side of the pattern to limit risk in case the breakout fails. Pipe tops and bottoms tend to be short-term patterns that sometimes complete in 1-4 weeks.

The pipe chart patterns were first introduced in the early 20th century by Charles Dow. They are short-term reversal signals, reflecting a pause in the prevailing trend as sentiment shifts from greed to fear, or vice versa, before prices reverse course.

18. Island Reversal

The island reversal is a candlestick chart pattern that signals a potential trend reversal. It is formed when a cluster of candlesticks is separated from the rest of the chart by empty space on both sides, looking like an island on the chart.

Island reversals form after an extended move higher or lower. The cluster of candlesticks represents an exhaustion gap, indicating the prior trend is likely overdone. The gaps above and below the island show a sharp transition in sentiment from greedy to fearful, or vice versa.

Traders watch for an island reversal to form and then wait for a breakout in the opposite direction to confirm the trend change. A downside breakout signals the start of a new downtrend, while an upside breakout marks the start of an uptrend.

Initial profit targets are set at the size of the island formation projected in the direction of the breakout. Stop losses are placed on the opposite side of the island gap to limit risk in case the reversal fails. 

The island reversal pattern was first popularised in the 1990s by Japanese candlestick charting experts. It reflects exhausted demand or supply after a long trending move. The isolation of the island shows indecision and imbalance between buyers and sellers.

How accurate are chart patterns?

Chart patterns do not always perform as expected. There is no chart pattern or indicator that is accurate. They just provide a means of better future analysis of a stock with better understanding of the current projection about the price. While chart patterns can be helpful signals, they only show what has happened in the past and do not guarantee future trends. Traders need to back up pattern signals with other indicators and their own analysis to help filter out false signals and improve the odds of profitable outcomes. 

What is an example of trading chart patterns?

Here is an example of Reliance Industries Ltd (RIL). Chart dating back to 16 September, 2022.

A trader or an analyst is expected to observe the price action happening on this stock.

RIL provided a clean opportunity after the observance of the Head and Shoulder Pattern clearly on the Daily Time Frame chart of the respective chart. The patience is maintained and price is expected to break the neckline for further thought of action.

The criteria and approach for this trade opportunity are as mentioned below.

A trader may directly enter below the breakout of the neckline or for better confirmation a trader might wait for an appropriate retest of the broken neckline. The neckline was working as support and bounced from the area multiple times. Later, the neckline that was supposed to act as a support and price broke below. Now the net buyers at the support failed and they shifted their perspective towards the short side as the neckline now is expected to work as a resistance.

A better risk management approach is maintained. A target is placed based on the height of the head or a nearby support becomes the target for the short side. A logical stop loss is placed.

What is the application of chart patterns in technical analysis?

Chart patterns provide technical analysts with a visual representation of market psychology and potential support/resistance levels, allowing traders to identify trends, set triggers, and define risk/reward ratios for their trades.

1. Identify Trend Reversals

One of the main uses of chart patterns is to spot potential trend reversals. For example, a head and shoulders top pattern signals an uptrend is about to reverse into a downtrend. Traders prepare to sell or short sell in anticipation of the downside breakout.

2. Confirm Continuation of Trends

Chart patterns like flags, triangles and channels indicate that a trend is likely to continue. Traders look for entry points in the direction of the ongoing trend when these patterns complete.

3. Determine Price Targets

Chart patterns often provide an estimate of the potential price move after the pattern completes. Measuring the height of the pattern projects the minimum expected price target on a breakout. This helps traders define upside or downside price objectives.

4. Determining Market Sentiment

The emergence of certain patterns provides insight into market psychology. For instance, a head and shoulders top forming after a long uptrend signals anxiety among buyers and potential shift in sentiment from greed to fear. Reading this psychology helps time market entries and exits.

5. Define Risk-Reward Ratios

Key levels created by chart patterns allow traders to identify logical stop losses and profit targets – effectively defining a trade’s risk-reward ratio. A defined risk-reward ratio helps implement sound money management.

6. Set Trading Triggers

Chart patterns define specific points, like the neckline of a head and shoulders pattern, which acts as triggers for entering or exiting trades. Traders often use breakouts from key pattern levels to trigger opening or closing out positions.

Recognizing chart patterns allows technical traders to identify opportunities to enter or exit positions, set price targets, manage risk, and gauge market sentiment.

What are Chart Patterns?

Chart patterns are the technical identification tools used to identify the potential trading opportunity. Chart patterns are actually imaginative forms of prices when an analyst connects important wicks (shadows of candlesticks) or important demand or supply levels that result in the creation of these so-called ‘Patterns’. 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. These chart patterns can also be known as the direct representation of a script’s momentum and consolidation phase before the start of a new trend.

Traders use technical analysis tools to analyze 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. For proper pattern formation, one should be patient and make appropriate trendlines to avoid wrong pattern formation. 
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. Trendlines are very useful and they work. But traders often plot incorrect trendlines in hastiness. An appropriate trendline is said to have an angle between 30 – 45 degrees. 

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. Angle of the trendline also provides extra support.
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. 

How to trade using chart patterns?

Using appropriate chart patterns can help traders take relevant trades that fit certain criterias. Let’s go step by step to understand in a better way. 

1. The first step is to identify established chart patterns on price charts. An established chart pattern is an appropriately drawn pattern that takes into account every minute important segment of the pattern, it should not be treated casually otherwise it will lead to generation of trading setups with false trading setups. One must observe certain patterns like head and shoulders, triangles, flags and pennants, double tops and bottoms, and others. It’s important to only trade patterns that are well defined with clear support and resistance levels.
2. The second step is to determine the predicted breakout direction, once you’ve identified a potential pattern, Reversal patterns like head and shoulders forecast a change in the existing trend. Continuation patterns align with the prior trend. Knowing the expected post-breakout movement is critical for your trade entry.
3. The third step is to wait for the breakout to occur, which is when the price moves beyond the identifiable support or resistance of the pattern. Don’t enter prematurely before a true breakout. Only trade when there is confirmation that the pattern is resolving in the expected direction. 
4. The fourth step is to set protective stops in the event of an unexpected price move against your position. Stops should be placed below pattern support for long trades or above resistance for short trades. This limits potential losses if the breakout fails.
5. Trailing stops are also recommended to lock in profits and adjust stops as the trade moves in your favour. Monitor trades closely as patterns may fail or see false breakouts that require stop adjustments. Only risk 1-2% of your account per trade to limit overall risk if patterns do not play out as predicted. Exit positions quickly if invalidated by the market. Chart patterns provide high-probability setups, but performance can vary in live markets. Sound risk management is important.
6. Identifying high probability trading setups is different and the psychological aspect of taking action is different. Mastering this trading psychology is of utmost importance. Risk management is another factor that when combined with classic price patterns and psychology can lead the right way of achieving consistent profitability.

Mastering the psychology behind classic chart formations, combining technical indicators for confirmation, and executing with rock-solid risk management paves the path to consistent profits in the stock market through buying and shorting pattern breakouts in the direction of the prevailing trend.

How to confirm a chart pattern before trading?

Confirming a chart pattern before actually placing a trade is very important. 

1. To confirm a chart pattern, the pattern must be clearly visible on the price chart with well-defined support and resistance levels. Gaps, large price variations, or choppy, unpredictable movement can indicate a lack of clarity. 
2. Second, volume should confirm the validity of the pattern. For example, lower volume during consolidation lends credibility to flag and pennant patterns. Higher volume on the breakout adds confirmation. 
3. The chart patterns can form on all patterns but they become relevant and less fakely on higher time frames, so traders look for relevant chart patterns on higher time frames. 
4. Finally, wait for one or two trading sessions. It is generally best to wait for the pattern to be completed by observing price action over one or two additional trading sessions before entering a trade, in order to help confirm that the breakout is valid and the emerging trend is likely to continue.
5. The current market environment needs to support the expected breakout direction. Factors like overall sector movement and momentum should not conflict with what the pattern projects.
6. A robust trading opportunity is analysed by finding additional confirmation to the current factors that are leading to an execution of a trading plan. These additional confirmations are gathered from technical indicators, technical tools like fibonacci, previous demand and supply zones on chart, lower time frame analysis and finding conjunction factors to the higher time frames. These additional confirmations thereby strengthens the existing trading plan and risk management systems. 

How to set up a stop loss while trading chart patterns?

Setting up a stop loss while trading chart patterns is underestimated and is of utmost importance to achieve a phase of consistent profitability. It is beyond the key support and resistance levels of the patterns recognized. Stop losses are account saviours. They protect capital and ensure the capital is available to trade new setups. Of course, in today’s era of capital markets, price manipulation has increased and possibilities of stop loss hit has increased because of which the retail participant often avoids placing one. Thus, observing an established and appropriate chart pattern, appropriate trade entries and identifying the correct target beforehand is crucial to understand the price to define a stop loss.
In the chart uploaded above, a double top pattern is observed on a daily time frame. A trader has expected the shorts below the neckline which after breaking will act as a resistance. The risky traders usually place alerts and enter at the break on the lower time frames. Risk averse traders will anticipate a proper retest on the default setting (Daily TF) in this case.

The stop loss is calculated by first measuring what the target is. The first method is by calculating the ratio of risk:reward, if trader expects to gain 1:2 trade setup, he/she may place the stop loss in that method or find the last lower high (Marked on the chart by blue) and target the nearest demand level (green line in above example).

It’s also important to consider adjusting the stop loss as the trade develops. Trailing stop losses are useful, where the stop moves higher as the trade moves in your favour. This lets profits run but ensures you are stopped out with small losses if the trade reverses against you. Review the stop loss periodically, such as after significant technical or news events, to ensure it is still in a logical place given the market conditions.

How to choose a profit target for chart pattern trading?

Traders choose a profit target when trading chart patterns by considering the size and scale of the pattern formation. The height of the pattern can provide insight into how far the trend may continue after a breakout occurs. However, traders should first determine their risk tolerance and the level of potential loss they are willing to accept on a trade. This exit point then serves as a stop loss to limit downside if the trend reversals. Additionally, patterns may fail to break out or see follow through at logical retracement levels, so taking partial profits is prudent. 

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 favourable price level, either to take advantage of an expected price trend or to minimise 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. 

When any pattern becomes ‘too good to be true’ & the retail crowd jumps into such trades. The script becomes manipulated and ends up reversing in the opposite direction. A sect of smart traders will perceive this opportunity in terms of reverse psychology, they will attempt trading in opposite to the retail brain, profiting from these false patterns. 

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. 

A strict risk management module in which stoplosses are kept on every bet keeps a trader in the game for a longer time, as markets are uncertain. 

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, perceiving the current opportunity with reverse psychology 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 behaviour 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 minimise 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 behaviour of the market by analysing 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 behaviour of the market and identify potential trends, reversals, and trading opportunities, by analysing chart patterns. Chart patterns are often used in conjunction with other technical analysis tools, such as technical indicators, to confirm signals and minimise 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 behaviour. 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 analysing chart patterns. Chart patterns should be used in conjunction with other technical and fundamental analysis tools to confirm signals and minimise 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.

For confirmation and avoidance of false breakout, a retest of a broken neckline is considered.

The more and more usage of chart patterns lead to more manipulation. Thus, a careful interpretation of quality chart patterns is a must. 

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 

Which timeframe is best for trading chart patterns?

The best timeframe for trading chart patterns are 1 hour, daily, weekly time frames.
Although the style of trading is different and unique for each trader. Traders usually try to identify a major chart pattern on a higher time frame and observe any minor relevant chart pattern on a lower time frame like 1 min, 5min, 15min. It is often noticed that the accuracy of chart patterns is directly proportional to the time frames. Meaning, it is more accurate on higher time frames and generates more false signals on lower time frames. 

For day traders, shorter time frames like the 1-minute, 5-minute, and 15-minute charts are common. These short timeframes allow you to closely analyse the price action and identify chart patterns as they form. These usually have the potential to generate a greater number of trades but also take in account false signals as well. Thus, traders combine these shorter time frame patterns with what’s going on on larger time frames to solidify their view about the price.

Swing traders typically use 30-minute, hourly, 4-hour, and daily charts. These time frames provide a balance between filtering out noise and capturing meaningful chart patterns. On an hourly chart, you will be able to spot reliable chart patterns that point to multi-day or multi-week trend changes in either direction. Traders spotting chart patterns on these time frames, usually break into lower time frames to time precise entries and stop losses. 

How to avoid false breakout while trading chart patterns?

Avoiding false breakout while trading chart patterns is of utmost necessity in today’s era of markets. Retail participation has increased and the textbook examples of chart patterns are usually spotted and traded by retailers, thus the big players often hunt the stop losses of retailers by trapping them into the illusion of trading chart patterns. 

1. That is why it is very critical to first validate a proper chart pattern. Additionally, higher and lower time frame analysis is important to avoid the spectrum of false breakouts. 
2. Traders often gather other confluences or factors to avoid the entry into a trappy or fake trade setups. These confluences increase the chance of taking higher probability setups and also ensures better risk management. 
3. Traders anticipate breakouts, but to avoid stop hunt, they keep patience to anticipate a proper break and a retest. A retest confirms the sentiment shift and strengthens the trading plan further. 
4. Traders should use confirmation indicators like MACD and RSI to validate price moves. 
5. They should wait for candles to fully close above or below support and resistance levels. Along with looking for retests of the breakout level and follow through in the intended direction. It helps to view the pattern on multiple time frames for confluence. Traders must also implement a stop loss and only enter if the risk to reward ratio is in their favour. 

Which books are essential for understanding chart patterns?

Below are eight books essential for understanding chart patterns.

Book	Author	Publication Date	Price (Converted to INR)	Image of Cover
Japanese Candlestick Charting Techniques	Steve Nison	2012	₹2,904.59
Encyclopaedia of Chart Patterns	Thomas Bulkowski	2005	₹4,967.81
Technical Analysis Explained: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points	Martin J. Pring	2014	₹3,321.55
Getting Started in Technical Analysis	Jack D. Schwager	2014	₹2,485.47
Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude	Mark Douglas	2012	₹1,408.63
Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications	John Murphy	2017	₹4,155.30
Charting and Technical Analysis	Laurence Holt	2017	₹2,485.47

What are the benefits of the chart patterns?

The benefits of chart patterns are that they provide traders an opportunity to observe markets with an objective perspective. The chart patterns directly reflect important price points. These price points further act as major and minor support and resistance levels, future targets, insights into market sentiment, psychology based on historic price action. 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 capitalising before the market moves in a different direction.
2. Risk minimisation: Traders can use chart patterns to set stop-loss orders and minimise 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 analyse 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 minimise 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.

What are the limitations of the chart patterns?

Chart patterns have limitations like subjectivity due to different observance and trading style, false signals due to higher manipulation, uncertainty, lagging indicator, and susceptibility to bias which require combining them with other indicators for optimal use in trading.

• Subjective Identification – Chart patterns require subjective interpretation of the chart.
• Prone to False Signals – Not all chart patterns end up giving valid signals.
• Predefined Outcomes – Each chart pattern is expected to result in a specific outcome – a breakout or reversal.
• Lagging – Chart patterns are lagging indicators since they are based on past price action.
• Time Horizon Uncertainty – A pattern sometimes takes weeks or months to fully form and break out.
• Undefined Stop Loss – Chart patterns do not define exact stop loss levels.

Traders should use chart patterns as a secondary confirmation tool rather than the primary indicator. Being aware of their limitations and using patterns in combination with other technical/fundamental indicators improves the trading performance.

How many types of chart patterns are there?

There are mainly 3 types of chart patterns. The main categories of chart patterns are divided into continuation patterns, reversal patterns, and bilateral patterns.

What are the bullish chart patterns?

Bullish chart patterns are technical formations that tend to evoke upward price movements in a stock. The most notable bullish chart patterns in stock market technical analysis include the cup and handle, ascending triangle, bull flag, and bull pennant. These patterns tend to form during an uptrend and signal a continuation of the upward momentum.

For example, in a cup and handle pattern, the stock first declines and moves sideways in a U-shape before breaking out upwards to new highs. Identifying these patterns and understanding what they imply about future price action helps traders spot opportunities to go long on a stock in anticipation of further gains. Technical analysts look for these bullish formations on stock charts to forecast periods of sustained buying pressure and upside.

What are the bearish chart patterns?

Bearish chart patterns are technical formations that tend to evoke downward price movements in a stock. The most common bearish chart patterns used in technical analysis of stocks are the head and shoulders, descending triangle, bear flag, and bear pennant. These patterns tend to form during a downtrend and signal a continuation of the downward momentum.

For example, a head and shoulders pattern is created when a peak is formed between two smaller peaks, creating a shape that resembles a head with two shoulders on either side. This pattern indicates distribution and often precedes a major decline in the stock’s price. Spotting these bearish formations on stock charts helps traders identify areas of potential selling pressure and position themselves to profit from an anticipated downturn. Technical analysts closely watch for these patterns to forecast periods of persistent selling and downside ahead.

Which chart pattern is the best for trading?

All the chart patterns are mere representations of price fluctuations that undergo various phases to create these so-called patterns. There are a few chart patterns that work better than others because of certain elements. Retail participation has increased and thus the newbie traders often get trapped by trading popular chart patterns on lower time frames. Traders have to accept that the chart patterns are not a full-proof way of achieving success. 

Few chart patterns that give lesser false signals and higher probability trade setups are flag and pole, double tops and bottoms, triangles. These patterns must be drawn properly and traders often find them in lower time frames in conjunction to the pattern formed on higher time frames. Head and shoulders pattern is also popular and good but the greater use of the pattern by retailers has generated greater manipulation.

Traders should maintain focus on experiencing more and more patterns and invest time critically to form a relevant pattern to avoid fakeouts. Traders should maintain composure during this phase and focus on improving psychological and mindset aspects of trading.

Which chart pattern is best for intraday trading?

All chart patterns are mere representations of price fluctuations that undergo various phases to create these so-called patterns. Price going under consolidation phase will generate a different pattern than a price in distribution phase.

Intraday trading has evolved with time. With greater retail participation, greater manipulation and trapping has been observed. So the chances of head and shoulder pattern working is less likely in today’s era of capital markets, because retailers are trading these patterns and big players profit from going against the retailers. As intraday trading involves price under larger volatility, traders trade double and triple tops and bottoms, wedges, triangles, flags and pennants. Careful and proper head and shoulder pattern also tends to work well only when plotted properly, so daytraders focus on this potential trend reversal pattern and use these patterns to identify momentum shifts and execute multiple trades in a single day

Flags and pennants work well for intraday trading because they can signal short-term sentiment shifts and momentum changes within the trading day that traders can capitalise on for quick profits.

Summary of chart patterns

Below is the summary of chart patterns with signals. 

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 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.