Top 10 Chart patterns that every trader should know
Chart patterns are an integral part of technical analysis.
But it takes getting used to them before they can be used effectively.
To help you master them
Here are 10 chart patterns that every trader should know.
Chart patterns are the basis of technical analysis.
Also the trader must know exactly what they are looking at, as well as what they are looking for.
There is no one ‘best’ chart pattern as they are all used to highlight different trends in many different markets.
Often, candlestick trading also uses chart patterns that make it a little easier to see the market’s previous opens and closes of the market.
Some chart patterns are more suited to a volatile market, while others are less so.
Some chart patterns are best used in a bullish market and others are also best used when the market is bearish.
It is very important to know about the ‘best’ chart pattern for your particular market.
As using it incorrectly, wrongly or not knowing which one to use can cause you to miss out on an opportunity to profit.
Before getting into the implications of different chart patterns.
It is important that we briefly describe support and resistance levels.
Support represents the level at which an asset’s price stops falling and bounces back.
Resistance is where the price usually stops rising and pulls back.
Resistance and support levels are appear because of the balance between sellers and buyers or demand and supply.
When there are more buyers than sellers in a market (or more demand than supply), the price rises.
There are more sellers than buyers more supply than demand, then the price usually falls.
For example, the price of an asset may be rising because demand exceeds supply.
However, the price will eventually reach the maximum level that buyers are willing to pay, and demand will decrease at that price level.
At this point, buyers may decide to close their positions.
This creates resistance and the price falls towards the support level.
As supply begins to outstrip demand as more and more buyers decide to close their positions.
Once the price of the asset has fallen enough, buyers can buy back into the market because the price is now more acceptable.
creating a support level where supply and demand begin to equalize.
Once the price crosses the resistance level, it can become a support level.
- Top 10 Chart patterns that every trader should know
- Types of Chart Patterns
- 1.Continuation patterns
- 2. Reversal patterns
- 3. Bilateral patterns
- 1.Symmetrical triangle
- 2. Pennant or Flags
- 3. Ascending triangle
- 4. Descending triangle
- 5. Cup and Handle
- 6. Double top
- 7. Rounding bottom
- 8. Double bottom
- 9. Wedges
- 10. Head and Shoulders
- Combined Chart Patterns
Types of Chart Patterns
Chart patterns broadly fall into three categories:
A continuation signals that an ongoing trend is continuing.
2. Reversal patterns
Reversal chart patterns indicate that the trend is about to change direction.
3. Bilateral patterns
Bilateral chart patterns tell traders that the price may move either way. – means the market is very volatile.
For all these patterns, you can take a position with CFDs.
That’s because CFDs let you go short and long meaning you can predict markets falling and rising.
You may want to go short during a bearish reversal or continuation, or go long during a bullish reversal or continuation.
whether you do so depends on the pattern and market analysis that you have carried out.
The most important thing is to remember when using chart patterns are
They do not guarantee that the market will move in the expected directions part of your technical analysis.
They are merely an indication of what will happen to the asset’s price.
A symmetrical triangle pattern can be bullish or bearish depending on the market.
In any case, it is usually a continuation pattern.
It means the market usually continues in the same direction as the overall trend after the pattern is formed.
Symmetrical triangles are formed when the price meets the series of lower peaks and higher troughs.
For example, the overall trend is bearish, but the symmetrical triangle shows that it has turned upside down for some time.
However, if there is no clear trend before the triangle pattern is formed, the market will break in either direction.
This makes the symmetrical triangles a bilateral pattern.
It means that they are best used in volatile markets.
where there is no clear indication of which way the asset’s price might move.
2. Pennant or Flags
Pennant patterns, or flags, are created after an asset has experienced a period of upward movement that followed by consolidation.
Generally, in the early stages of a trend, there is always a significant rise before it enters a series of short up and down movements.
Pennants can be bullish or bearish, and they indicate either a continuation or a reversal.
In therespective pennants,while they are in a bilateral pattern form, they definitely show a continuities or reversals.
While a pennant may look like a wedge pattern or a triangle pattern.
It’s important to note that the wedges are thin, Rather than pennants or triangles.
Wedges also differ from pennants because a wedge is always ascending or descending, while pennant is always horizontal.
3. Ascending triangle
The ascending triangle is a bullish continuation pattern that indicates the continuation of an uptrend.
Ascending triangles can be drawn on charts by placing a horizontal line along swing highs and resistance.
And then drawing an ascending trend line along swing lows – support.
Ascending triangles often have two or more identical highs that allow a horizontal line to be drawn.
A trend line represents the overall uptrend of the pattern.
while a horizontal line represents a historical level of resistance for a particular asset.
4. Descending triangle
Conversely, a descending triangle indicates a bearish continuation of a downtrend.
Typically, a trader enters a short position during a descending triangle – perhaps with CFDs – in an attempt to profit from a falling market.
Descending triangles usually turn lower and break support.
Because they represent a market dominated by sellers.
It means successive lower peaks are likely to prevail and are unlikely to reverse.
Descending triangles can be identified from a horizontal support line and a downward sloping resistance line.
Eventually, the trend breaks support and the downtrend continues.
5. Cup and Handle
The cup and handle pattern is a continuation bullish pattern
It was used to show a period of bearish market sentiment.
Before the overall trend finally resumes in a bullish motion.
The cup looks like a rounding bottom chart pattern and handle also resembles a wedge pattern.
Following a rounding bottom, the asset price may enter a temporary retracement called a handle.
because this retracement is limited to two parallel lines on the price graph.
The asset will eventually reverse from the handle and continue with the overall bullish trend.
6. Double top
Another pattern traders use to highlight trend reversals is the double top.
Generally, the asset price experiences a peak before returning to the support level.
It will climb higher once more before a more permanent pullback against the prevailing trend.
7. Rounding bottom
A Rounding bottom chart can indicate a pattern continuation or reversal.
For example, during an uptrend an asset price may retreat slightly before rising again.
This will be a bullish continuation.
A rounding bottom is formed when an asset’s price is in a downward trend.
before the trend reverses and enters a bullish uptrend Traders try to capitalize.
Bottom, on this pattern by buying halfway through the low point and investing on continuation after breaking above the resistance level.
8. Double bottom
A double bottom chart pattern indicates a selling period.
That causes the price of the asset to fall below the support level.
It rises to a resistance level before falling again.
Finally, the trend reverses as the market becomes more bullish and starts an upward movement.
A double bottom is a bullish reversal pattern as it signals the end of a downtrend and a shift towards an uptrend.
Wedges are formed when asset price movements tighten between two sloping trend lines.
There are two different types of wedges rising and falling.
A rising wedge is indicated by a trend line trapped between two upward-sloping lines of support and resistance.
In this case the support line is steeper than the resistance line.
This pattern usually indicates that the asset price will eventually decline.
Also more permanently this is demonstrated when a support level is breached.
A falling wedge forms between two downward sloping levels.
In this case the resistance line is steeper than the support line.
For example, an asset’s price is rising and breaking through a resistance level usually indicates a fall.
Both rising and falling wedges are reversal patterns.
The rising wedges indicates a bearish market and falling wedges being more typical of a bullish market.
10. Head and Shoulders
A head and shoulders is a chart pattern in which there is a small peak on either side of a large peak.
Traders look for head and shoulders patterns to predict a bullish – to-bearish reversal.
Generally, the first and third peaks are smaller than the second.
But they all come back to the same level of support, otherwise known as the ‘neckline’.
After the third peak falls back to the support level, it is likely to enter a bearish downtrend.
Combined Chart Patterns
All of the patterns described in this article are useful technical indicators.
It helps you to understand how or why an asset’s price has moved a certain way
Also, you can understand how it might change in the future.
Because chart patterns can highlight the areas of resistance and support.
This helps a trader decide whether they should open a long or short position
Or should they close their open positions in the event of a possible trend reversal.