TYPES OF MARKET TRADING CHART PATTERNS

Trading chart patterns, unlike technical indicators, do not require mathematical calculations or algorithms but they rather serve as observations. We draw patterns directly on a chart in order to find the turning point and predict further price reaction. We distinguish two kinds of patterns: continuation and reversal patterns. We are speaking about continuation patterns when the price, after concluding them, continues its movement in the same direction as before. A reversed pattern indicates a turning point in the price in the direction opposite to the formation it took place before.

Head and Shoulders

This trading pattern contains six lines creating three peaks: two lower and the middle one higher than the other two. The neckline connects the lowest points of the formation. The head and shoulders formation follow an uptrend and indicate a reversal of price movement. When the price reaches the neckline after setting the second shoulder, it is a good moment to open a short position as the price will most probably break the neckline downward and drop to the level of the beginning of the formation.

Reverse Head and Shoulders

A reversed head and shoulders trading chart pattern is constructed similarly to the classic one, with the difference being that instead of peaks it contains dips because it follows a downtrend. The neckline connects the highest points of the formation. It is generally a good moment to open a long position after a second shoulder is formed and the price reaches the neckline of the formation. A reversed head and shoulders pattern indicates an upcoming uptrend.

Channels

A channel is composed of long-term price wavering between resistance and support lines parallel in regard to each other. There are three main types of channel patterns: rising, falling, and horizontal. In rising (ascending) channel the highs and lows are getting higher, while a falling (descending) channel is characterized by lower highs and lows. The price in the channel doesn’t consolidate, the resistance and support line remain parallel until the price breakout. The bottom of the channels is considered as a buy area as the price is going to bounce off from the support line and rise. The upper area of the channel is considered as the sell zone, as the price is about to bounce off from the resistance line and head down.

Flag

A flag resembles a channel, although it is a short-term pattern extending usually not more than four weeks and usually representing a correction movement. Flag formation proceeds with “a flagpole” – sharp, vertical price movement. As the flagpole appears, the bearish traders tend to close their position in order to avoid potential losses. The massive sell-out gradually presses the price down, creating what appears on the chart to be a parallel sequence resembling a flag shape.

Pennant

A pennant pattern, similar to a flag, contains a sharp price rise like “a flagpole.” The flagpole is followed by, unlike in the case of the flag pattern, the consolidating price movement which is close to symmetrical triangle formation.

Triangle Patterns

Triangle is in most cases a continuation pattern. It has three types: symmetrical, ascending and descending.

Symmetrical Triangle

In the case of a symmetrical triangle, the line matching the price’s highs and the line matching its lows create the sides of a triangle. Lower and lower heights against rising lows are a sign of sellers and buyers pushing the price with the same intensity and not allowing a trend formation. The price pressed to the tip of the triangle usually indicates an upcoming breakout – either up or downward.

Ascending Triangle

In an ascending triangle, the highs in price create a resistance. However, price lows pushing up means that the buyers are getting stronger against the sellers. The rising line, led along the lows, at some point connects with the resistance line. The price pressed to the tip of the triangle, as a rule, indicates an upcoming breakout downwards. The price usually drops approximately the same height of the triangle.

Descending Triangle

In an ascending triangle, the highs in price create a resistance. However, price lows pushing up means that the buyers are getting stronger against the sellers. The rising line, led along the lows, at some point connects with the resistance line. The price pressed to the tip of the triangle, as a rule, indicates an upcoming breakout downwards. The price usually drops approximately the same height of the triangle.

Double Top Pattern

A double top is one of reversal trading patterns which consists of, as the name indicates, two peaks approximate in shape to each other. After the price reaches the first top, it pulls back and then returns to the level of the first top, tests it, and then retraces to the area before the formation. Both peaks create a strong resistance area leaving the price unable to hike back or move above it. It means the formation is completed and now the price can be expected to drop.

Double Bottom Pattern

A double bottom is another reversal pattern and a reflection of a double top formation. It is composed of two ditches located approximately at the same level. After the price reaches the first bottom, it pulls back and then returns to the level of the first ditch, tests it, and rises back to the area before the formation. Both peaks create a strong support area where the price is unable to dip lower and cross. With the completion of the pattern, the price can be expected to rise.

Wedge Patterns

Wedge signals the pause in a trend. After the wedge is completed, we can expect either the same or a reversed price movement before the formation. We distinguish two types of a wedge: rising and falling. They differ from a channel with price consolidation. Wedges can act as both continuation and reversal patterns.

A rising wedge is formed by highs getting higher and the lows also getting higher as the price consolidates while it wavers between the resistance and support levels. Once the price breaks the wedge, it might continue its movement in the same direction as before or change the direction it had before the wedge was created. Observing the breakout from the formation helps to open a profitable position.

Falling Wedge

A falling channel is composed of highs getting lower and the lows getting even lower as the price consolidates before a breakout. In the case of a falling wedge, we need to watch the price movement carefully at the moment of a breakout, as the price might go either way: upward or downward.

Bat pattern

A bullish bat pattern contains four legs. It starts with the longest, XA leg, which is formed by the price’s sharp hike. Second leg (AB), retraces about 50% of XA (but not more than 61.8%, because then it’s a Gartley formation). The third leg (BC) reaches at least 61.8% of AB but closes below point A. Fourth leg (CD) is closed at 88.6% of XA.

When we set Fibonacci retracement at AD, levels 38.2 and 61.8, and the level 20 pips below the X will be our stop loss levels.

For the bearish bat pattern, reversed settings should be considered.