Chart Patterns

Knowledge Base

Search Knowledge Base by Keyword

Chart Patterns

You are here:
< All Topics

 

Below are 16 chart patterns commonly used by traders.  altFINS identifies these patterns across multiple time intervals, saving traders a ton of time.

Price patterns appear when traders are buying and selling at certain levels, and therefore, price oscillates between these levels, creating patterns.  When price finally does break out of the price pattern, it can represent a significant change in sentiment.

Patterns that emerge over a longer period of time generally are more reliable, with larger moves resulting once price breaks out of the pattern. Therefore, a pattern that develops on a daily chart is expected to result in a larger move than the same pattern observed on an intraday chart, such as a one-minute chart.

Patterns often have false breakouts, therefore, traders can increase their success by confirming breakouts with other indicators (RSI, MACD, etc.) or even a simple volume trend. Ideally, a price breakout (above a resistance or below support line) is accompanied by an increase in volume.  The subsequent move is likely to be substantial. Hence, the increase in volume can confirm the validity of the price breakout. A breakout with little or no increase in volume has a higher chance of failing, especially if the move is to the upside.

There is always some uncertainty when trading charting patterns as you are working with probabilities. Proper risk management is essential in any trade to avoid excessive losses.  This includes setting proper Stop Loss orders, using appropriate trade size and leverage.

 

Ascending Triangle

Description: Two or more equal highs forming a horizontal line at the top; two or more rising troughs forming an ascending line that meets the horizontal line.  It forms during an uptrend (bullish).

Trade: Typically, a breakout will occur in the direction of the existing trend. Most traders will take a position once the price action breaks through the top line of the triangle with increased volume, which is when the stock price should increase an amount equivalent to the widest section of the triangle.

 

Descending Triangle

Description: Two or more equal lows forming a horizontal line at the bottom; two or more declining peaks forming a descending line that meets the horizontal line. It forms during a downtrend (bearish).

Trade: Typically, a breakout will occur in the direction of the existing trend. Most traders will take a position once the price action breaks through the bottom line of the triangle with increased volume, which is when the stock price should decline an amount equivalent to the widest section of the triangle. 

 

Symmetrical Triangle

Description: Symmetrical triangles are continuation patterns developed in markets that are without clear direction. During this period of indecision, the highs and the lows come together in the point of the triangle with low volume. Investors just don’t know what position to take.  When the investors do finally figure out which way to go, it heads north or south with big volume in comparison to volume leading up to the breakout.

Trade: Enter a trade at the breakout point in the direction of the breakout, which is typically a continuation of previous bigger picture trend.

 

Head and Shoulders

Description: Three successive peaks: middle is the highest and the two outside lower and relatively equal in height. It forms after an uptrend and often signals upcoming trend reversal (from bullish to bearish). The head and shoulders pattern is believed to be one of the most reliable trend reversal patterns.

Trade: Wait for pattern to complete and price to break out – to move lower than the neckline after the peak of the right shoulder.  The most common entry point is when a breakout occurs – the neckline is broken and a SELL trade is taken.

 

Inverse Head and Shoulders

Description: Three successive peaks: middle is the lowest and the two outside higher and relatively equal in height. It forms after a downtrend and often signals upcoming trend reversal (from bearish to bullish).

Trade: Wait for pattern to complete and price to break out – to move above the neckline.  The most common entry point is when a breakout occurs – the neckline is broken and a BUY trade is taken.

 

Channel Down and Channel Up

   

Description: Trading range between diagonal parallel lines. It forms when an up or downtrend is formed between parallel support and resistance lines.  It suggests either a possible reversal in the trend or a change in the slope of the current trend.

Trade:  1) with emerging patterns, traders who believe the price is likely to remain within its descending channel can initiate trades when the price fluctuates within its channel trendlines, 2) with complete patterns (i.e. a breakout) – initiate a trade when the price breaks through the channel’s trendlines, either on the upper or lower side.  When this happens, the price can move rapidly in the direction of that breakout.

 

Bullish and Bearish Flag

   

Description: Short term (shorter time interval) small rectangle trading range between diagonal parallel lines.  It moves counter to the prevailing price trend observed in a longer time frame on a price chart. It forms typically following a sharp advance or decline and often indicates a small change in direction (or areas of consolidation) before the previous trend resumes.

Flag patterns can be either upward trending (bullish flag) or downward trending (bearish flag). Flag pattern is among the most reliable continuation patterns that traders use because it generates a setup for entering an existing trend that is ready to continue.

Trade:  Trade is initiated on a breakout, if it is in the same direction as the prevailing trend.  Also, with bullish flag patterns, traders prefer a breakout with an increase in volume but it isn’t a must. With bearish flag patterns, the breakout volume may not be that different from the volume preceding it.

 

Falling Wedge

Description: Two converging lines slanted downward. It usutally forms after a downtrend and suggests a potential bullish reversal in the original downtrend. However, it can also appear in an uptrend, in which case, it indicates a likely continuation of that trend.  Either way, Falling Wedge typically results in a bullish breakout.  Falling Wedge tends to be a more reliable indicator than a rising wedge.

Trade:  When price breaks the upper trend line the price is expected to trend higher.  Emerging patterns (before a breakout occurs) can be traded by swing traders between the convergence lines; however, most traders should wait for a completed pattern with a breakout and then place a BUY order.

 

Rising Wedge

Description: Two converging lines slanted upward.  It usually forms after an uptrend but can also occur during a downtrend. There’s usually declining volume as the price rises through the pattern  (i.e. price/volume divergence). Rising wedge typically results in a breakdown (bearish).

Trade:  Emerging patterns (before a breakout occurs) can be traded by swing traders between the convergence lines; however, most traders should wait for a completed pattern with a breakdown and then place a short sell order.

 

Double Bottom

Description: Two consecutive, roughly equal troughs with a moderate peak in between (resembles a “W” shape). This powerful chart pattern occurs after an extended downtrend and often represents a reversal pattern that indicates a minor, if not long term, change from a downtrend to an uptrend (i.e. bullish).  A spike in volume often occurs during the two upward price movements in the pattern. These spikes in volume are a strong indication of upward price pressure and help confirm a successful double bottom pattern.

Trade:  Place a BUY order when the price breaks through the resistance line (neckline) and completes the pattern.

 

Double Top

Description: Two consecutive, roughly equal peaks with a moderate trough in between (resembles an “M” shape). This powerful chat pattern occurs after an extended uptrend and often represents a reversal pattern that indicates a minor, if not long term, change from a uptrend to an downtrend (i.e. bearish).

Trade:  Place a SELL order when the price breaks through the support line (neckline) and completes the pattern.

 

Triple Bottom

Description: Three consecutive, roughly equal troughs which may at first resemble a double bottom. These troughts represent failed attempts to break through an area of support. Each test of support is typically accompanied by decreasing volume, until a breakout in price occurs with an increase in volume. The pattern occurs after an extended downtrend and often represents a reversal pattern that indicates a minor, if not long term, change from a downtrend to an uptrend (i.e. bullish).

Trade: Place a BUY order when the price breaks through the resistance line and completes the pattern.

 

Triple Top

Description: Three consecutive, roughly equal peaks which may at first resemble a double top. These peaks represent failed attempts to break through an area of resistance. Each test of resistance is typically accompanied by decreasing volume, until a breakout in price occurs with an increase in volume.  It occurs after an extended uptrend and often represents a reversal pattern that indicates a minor, if not long term, change from an uptrend to a downtrend (i.e. bearish).  Trading volume trends should also be employed to confirm the strength of the signal.

Trade:  Place a SELL order when the price breaks through the support line and completes the pattern.

 

Bullish and Bearish Pennant

Description: A small converging symmetrical triangle (called Pennant). It forms typically following a sharp advance (bullish) / decline (bearish), followed by a brief triangular shaped consolidation in price (a small change in direction), before the previous uptrend (bullish) / downtrend (bearish) resumes. The period of consolidation should have lower volume and the breakouts should occur on higher volume. If there isn’t a flagpole (sharp advance / decline), then it’s a triangle and not a Pennant. Also, Pennants is a short-term pattern, unlike a triangle.

Trade: Traders look for a breakout above the Pennant resistance (bullish) / support (bearish) line to take advantage of the renewed momentum.

 

Rectangle

Description: The rectangle pattern characterizes a pause in trend whereby price moves sideways between a parallel support and resistance zone. The pattern usually represents a consolidation in price before continuing in the original direction of the existing trend (up or down).

Trade: A swing trader can trade an emerging rectangle formation by buying at support and selling at resistance.  A trend trader just waits for a breakout in the original direction of the trend with a candle close below/above the support/resistance depending on trend direction – enter at the candle close.