Are There The Best Chart Patterns?

Technical analysis contains indicators as well as candlestick and chart patterns. Indicators are widely used by traders, as they evaluate market conditions automatically and provide certain signals. Candlestick and chart patterns are more complicated technical tools, as they may be subjective and not so clear. Sometimes, traders struggle to define patterns, as they never exist in a perfect form on the trading chart. However, chart patterns are vital for successful trades. Keep reading to learn the most effective tools.

What Are Chart Patterns?

A chart pattern is a certain shape that resembles a well-known subject, such as flags, triangles, or a cup. It’s formed by candlesticks on a price chart. Patterns are widely used to help traders determine the market direction as well as entry and exit points.

Why Is It Essential To Analyze Chart Patterns?

It’s recommended to analyze chart patterns, as they provide additional trading signals. Of course, you can use only technical indicators. However, chart patterns occur on price charts often. Thus, not knowing this tool, you just miss an opportunity to catch additional signals or confirmations of alerts you got from indicators.

Chart Patterns: Types

There are three major types of chart patterns, including reversal, continuation, and bilateral. Categorization is based on the signals chart patterns provide.

A reversal pattern usually appears at the end of a market trend and signals its change. The most popular reversal patterns are double tops/bottoms, head and shoulders, and inverse head and shoulders.

A continuation pattern signals the current trend will continue. It occurs in periods of short-term corrections within a prevailing trend. A correction occurs, as the market can’t always move in one direction; bulls and bears need time to catch their breath. During periods of correction, traders should be careful, as the trend will either continue or reverse. Trendlines are widely used to draw continuation chart patterns. Traders consider whether the price breaks above or below the correction zone. The most common examples of continuation patterns are wedges, flags, and pennants.

A bilateral pattern reflects the market uncertainty and increased volatility. It signals that the market may move in either way. Thus, they don’t provide accurate signals. Ascending, descending, and symmetrical triangles are examples of bilateral patterns.

Key Terms

Before we list chart patterns, we would like you to review some crucial terms that will be widely used to explain how chart patterns work.

Chart patterns are determined by lines and/or curves. Therefore, you should know what a trendline is. The trend line is a straight line that connects a series of highs and lows. In an uptrend, it moves up as the price forms higher highs and lows. In a downtrend, the trendline falls as the price moves down, forming lower highs and lower lows. In periods of correction, when the price moves sideways, the line is drawn horizontally. The trendline is mostly drawn through closing prices; there should be at least two points. The aim of the trendline is to determine support and resistance areas.

Chart patterns’ signals are based on support and resistance levels. A support level is a boundary that is expected to prevent the decline in the price. Thus, there may be a price retracement from it. Resistance is a level that is anticipated to pull the price down and limit its further rise.

Best Chart Patterns

We should warn you that there are no best chart patterns. However, there are basic patterns that are used by most traders. These patterns have confirmed their effectiveness; that’s why we have listed them.

Ascending Triangle

An ascending triangle is a bullish continuation pattern. The trading pattern consists of a horizontal line drawn through highs and an ascending trendline drawn through lows. These lines serve as resistance and support levels.

The indicator’s signal is confirmed if the price breaks above the resistance boundary and keeps rising. A trader can open a buy position on a breakthrough of the resistance line.

Descending Triangle

A descending triangle opposes the ascending triangle pattern. It’s a continuation pattern that confirms a downtrend will continue. The pattern has two lines - support and resistance. The resistance level goes through falling highs, while the support level is a horizontal line drawn through lows.

The downtrend signal is confirmed when the price closes below the support level. It works as a signal to open a sell position.

Symmetrical Triangle

The symmetrical triangle pattern doesn’t provide an accurate signal. It shows the price may move either way depending on market conditions. However, in most cases, it works as a continuation pattern. Therefore, you can expect the trend to continue after a short-term correction within the pattern.

The pattern is represented by two lines going to one point but never meeting there. It means that the resistance line goes through falling maximums, and the support line links rising minimums.

As there is no certain signal, a trader should wait for the price to break any of the levels. After, they can open a trade in the direction of a breakout.

Pennant

The pennant pattern resembles a symmetrical triangle. The pennant is a continuation pattern that is formed by two converging trendlines drawn through a series of sequential highs and lows.

As for differences, the pennant pattern has a flagpole at its beginning. The flagpole is formed as there is an unexpected surge or plunge in the direction of the present trend. The flagpole reflects the aggressive actions of bulls/bears reflected in heavy price volume. The pennant pattern appears as a pause in the aggressive price movements.

Another difference is the duration of the pattern. While the symmetrical triangle pattern exists for a short-term period, the pennant formation lasts for a month. However, traders should be careful because the triangle pattern can be formed over months and years. Thus, if the pennant pattern is forming over 13 weeks, it becomes a triangle.

One more difference is that converging lines of the triangle pattern rarely meet at one point, while those of the pennant formation touch each other. Usually, the pennant pattern stops forming after the lines meet at one point. After that, the price continues moving in the direction of the current trend.

Price Channel

The price channel pattern occurs when the price corrects. It consists of two parallel lines, so-called boundaries, and the price moves between them. The channel can move up, down, or sideways. It’s an easy pattern used by newbies to practice technical analysis. It helps to measure the momentum and identify trading channels.

The price channel pattern is widely used in breakout strategies. If the price breaks above the level of resistance, a trade can open a long position. If the price falls below the support level, you can open a short position. It’s also easy to trade within the channel, as there are accurate support and resistance boundaries used as levels from which the price will rebound. If the price approaches a resistance level, you can consider a sell trade. If the price touches a support level, you can consider a buy position.

Flag

A flag is a common continuation pattern. It consists of two trendlines moving in parallel. The lines move upwards, downwards, or sideways. The flag pattern serves as a pause in the overall trend. The falling flag usually occurs in a strong bullish trend, while the rising flag mostly appears in a strong bearish trend.

The price volume is expected to decline during the pattern’s formation, as buyers/sellers need time to recover and continue boosting the price in the direction of the current trend.

Wedge

A wedge is a continuation chart pattern. Same as the pennant, it’s formed by two converging lines. The only difference is that they move in one direction.

The wedge pattern can be rising and falling. The falling wedge is formed within an uptrend. It signals a pause in a strong bullish movement. Traders should wait for the price to break above the upper boundary of the pattern to open a long position. A rising wedge happens in a downtrend. Traders can open a short position as soon as the price falls below the lower boundary of the wedge.

Double Bottom

A double bottom is a reversal chart pattern. It’s easily recognized, as it consists of two bottoms connected with a peak. It resembles the letter W.

The pattern occurs at the end of a downtrend. The price forms a low, then slightly reverses and falls again. A reversal signal is confirmed only when the price breaks above the level of the peak formed between two lows. It’s a so-called neckline. When the price closes above the neckline, you can open a buy position.

Double Top

The double top pattern mirrors the double bottom. It’s formed at the end of a bullish trend and signals a price reversal. It resembles the M letter. The price reaches a peak, then corrects for a while, forming a trough, moves up again, and falls.

The pattern is considered finished when the price breaks below the neckline drawn through the trough.

Triple Bottom

A triple bottom implies the same idea as the double bottom pattern. The only difference is that it has three consecutive lows with two short-term upward pullbacks in between. To catch a reversal signal, you should wait for the price to close above the resistance level drawn through two peaks formed within the pattern.

Triple Top

If you can define the double top pattern, you will succeed with the triple top one. It consists of three highs. The price should correct down two times. After it corrects down for the third time and breaks below the neckline drawn through two troughs, you can open a short position. The pattern is formed at the end of an uptrend and signals a long-term decline.

Head and Shoulders

A head and shoulders is a reversal pattern formed at the end of an uptrend. It signals the price may form a downtrend soon. The pattern consists of one large peak and two smaller peaks on either side of it. The large high resembles a head, and smaller highs serve as its shoulders.

To catch a signal, a trader should draw a neckline through the lows between the head and its two shoulders. If the price falls below this line after the formation of the second shoulder, it will be a sign of a downtrend formation.

Inverse Head and Shoulders

There is also an inverse head and shoulders pattern. It looks similar, but instead of peaks, the price forms bottoms. The pattern appears at the end of a downtrend and signals a formation of an uptrend. The signal is confirmed when the price closes above the neckline after the formation of the second shoulder.

Rounding Top or Bottom

Rounded top and bottom are patterns that predict a trend reversal. The rounded top, also known as an “inverse saucer,” has a shape of an inverted U. It’s formed at the end of a bullish trend and signals a reversal down. The rounded bottom, also called a “saucer” has the shape of a U. It appears at the end of a bearish trend and says the price may reverse up soon. The pattern is widely used by stock traders.

Cup and Handle

A cup and handle pattern provides a signal for the continuation of the uptrend. It’s a reversal pattern, which means it’s formed at the end of a bearish trend.

The pattern is called cup and handle because it resembles a cup in the shape of a U and the handle with a downward drift. The cup resembles the rounding bottom pattern, while the handle looks like the wedge pattern.

Bump and Run

Bump and run is a chart pattern that signals the end of one trend and the formation of a new one. The pattern works for fast-changing price actions. Therefore, it’s widely used on the stock market. It’s mostly applied to short-term timeframes.

The pattern can be divided into two parts. The first one represents a prevailing trend. The swing lows (uptrend)/highs (downtrend) are connected with a trendline or so-called lead-in trendline.

The second part is an acceleration of the prevailing uptrend. Within this part, the price will move from the lead-in trendline and fluctuate in a parabolic trajectory. The sell (uptrend) and buy (downtrend) signals are formed when the lead-in trendline is formed in the opposite direction to the previous trend.

The Spring

It’s unlikely you will find the spring in a list of the most popular chart patterns. However, you should learn it, especially if you want to trade stocks. The spring can also be called stop-hunt, 2B, pump fake, and fake-out.

It’s a continuation pattern formed in periods of price consolidation. The price forms a significant high or low point and rebounds. Later, it retests that level, forming a fake breakout. The pattern occurs on the resistance level in a downtrend and on a support level in an uptrend.

The Supernova

The supernova is a stock chart pattern. It’s a breakout pattern that appears in periods of enormous volatility. The pattern reflects an explosion in price that provides numerous buying and selling opportunities.

The pattern appears due to fundamental factors, including news, world political and economic events, and company hype. When trading on this pattern, traders should be careful. Strong news triggers high volatility. However, the market can’t be volatile for a long time, and price volume will reduce soon. Therefore, traders should know how to calculate the approximate period of increased volatility to close the position before the market moves in the opposite direction.

Final Thoughts

Chart patterns are a vital part of technical analysis. It’s highly important to know what major patterns look like. This will help you to determine the upcoming price direction as well as set entry and exit points. However, you should always combine chart patterns with technical indicators, as chart patterns never exist in their perfect shapes on the real price chart. It means that you can either be confused when defining the pattern, or its signals can be inaccurate. Always get signal confirmations from other technical tools and practice your skills on a demo account.

For example, the NAGA trading platform provides an opportunity to open a demo account and try trading various financial instruments, including stock CFD, forex, and futures.