Basic Chart Pattern
Chart patterns are the foundation for technical analysis of charts. They repeat in different markets and time intervals and are relatively easy to identify. Chart patterns can be used to define good entry and exit points. Every professional trader uses chart patterns, whether scalpers, day traders, swing traders, position traders and long-term investors.
Chart patterns should help to predict the future development of the price. They are either bullish (price rises in the further course) or bearish (price falls in the further course).
In addition, chart patterns can also be divided based on their behavior. There are patterns that continue a trend (continuation patterns), patterns in which a trend reversal takes place (reversal patterns) and patterns that do not have a defined direction, which means that the price can both continue and reverse (bilateral patterns).
Chart patterns can be used to define the entry and exit points as well as the stop-loss limit, making a trade more predictable and thus reducing the risk of wrong decisions.
Table of Content
Continuation Patter
A continuation pattern indicates that the price continues to move in the same direction as before the pattern. There are several continuation patterns that are used in technical analysis to determine whether the price continues to follow its trend. We have summarized the most important continuation patterns below.
Falling Wedge
A falling wedge can be a pattern for a continuation of the trend as well as for a trend reversal, but in any case it is a bullish pattern.
In the chart you can see an example of a falling wedge that continues the trend. The price rises, and then goes into a bearish countertrend with lower highs and lower lows before the price breaks out of the wedge to the upside. A falling wedge is usually also characterized by decreasing trading volume.
Rising Wedge
A rising wedge can be a pattern for a continuation of the trend as well as for a trend reversal, but in any case it is a bearish pattern.
In the chart you can see an example of a rising wedge that continues the trend. The price falls, and then goes into a bullish countertrend with higher highs and higher lows before the price breaks out of the wedge to the downside. A rising wedge is usually also characterized by decreasing trading volume.
Bullish Flag
A bullish flag a typical sign of a trend continuation and as the name suggests a bullish pattern. It occurs after a strong upward movement of the price and is usually initiated by profit taking by market participants.
However, since there are enough buyers in the market, the price does not drop appreciably and returns to an upward movement. When the price breaks the upward through the pattern, there is usually another strong upward movement.
The “flag” can be horizontal or with a downward tendency as seen in the picture. When the flag pole is formed, the trading volume increases, while when the flag is formed, the trading volume decreases.
Bearish Flag
A bearish flag, like the bullish flag, is a sign of a trend continuation and, as the name suggests, a bearish chart pattern, which means that the future price is falling.
The bearish flag occurs after a strong downward movement of the price and shows a short consolidation phase. However, as the market sentiment remains negative and there are not enough buyers in the market, the price continues to fall. When the price breaks the pattern to the downside, there is usually another sharp downward movement.
The bear flag can be horizontal or with an upward tendency, as shown in the picture. When the flag pole is formed, the trading volume increases, while it decreases when the flag is formed.
Cup and Handle
A Cup and Handle is a bullish continuation pattern, i.e. the future price will tend to rise. In a cup and handle, a cup-shaped or U-shaped chart is first formed which bounces off a horizontal resistance to break through this resistance after a short consolidation phase (the handle).
The volume during handle formation decreases. After breaking through the resistance level, there should be a strong upward movement with a high trading volume.
The depth of the cup when it is formed should be no more than 1/3 to 1/2 of the previous rise, the handle, in turn, no more than 1/3 of the depth of the cup and can also have the form of a bull flag.
Reverse Cup and Handle
A reverse Cup and Handle, sometimes also called inverted Cup and Handle is a bearish continuation pattern, i.e. the future price will tend to decline. In a reverse cup and handle, a inverted cup-shaped or n-shaped chart is first formed which bounces off a horizontal support Level to break through this support after a short consolidation phase (the inverted handle).
The volume during handle formation decreases. After breaking through the support level, there should be a strong downward movement with a high trading volume.
The high of the inverted cup when it is formed should be no more than 1/3 to 1/2 of the previous decline, the handle, in turn, no more than 1/3 of the high of the cup and can also have the form of a bear flag.
Reversal Pattern
A reversal pattern suggests that the price will reverse its trend in the further course of the pattern. There are various reversal patterns that are used in technical analysis to find out whether the price changes its trend. We have summarized the most important reversal patterns below.
Rising Wedge
A rising wedge can also be a trend reversal pattern, and is a bearish chart pattern. It usually occurs within a long-term downtrend and indicates an imminent breakout to the downside.
The rising wedge pattern is defined by two rising converging trend lines in combination with a falling trading volume.
In the chart you can see an example of a rising wedge initiating a trend reversal. The price bends from a steep, short-term upward movement. Higher highs and higher lows follow before the price breaks out of the wedge to the downside.
Falling Wedge
A falling wedge can also be a trend reversal pattern, and is a bullish chart pattern. It usually occurs within a long-term uptrend and indicates an imminent breakout to the upside.
The falling wedge pattern is defined by two falling converging trend lines in combination with a falling trading volume.
In the chart you can see an example of a falling wedge initiating a trend reversal. The price bends from a steep, short-term downward movement. Lower lows and lower highs follow before the price breaks out of the wedge to the upside.
Head and Shoulders
A head and shoulders pattern is one of the most famous, popular and reliable chart patterns. Its distinctive shape makes it easy to identify and it occurs in all time intervals.
The head and shoulders pattern indicates a change in trend, from an uptrend to a downtrend, i.e. it is a bearish signal.
In the picture you can clearly see how the pattern is formed.
The first shoulder is usually formed after a stronger upward phase, after a short consolidation a new higher high, the “head” is formed. The price falls again to the level of the neckline which serves as a support level. In the further course, the chart tries to form a new high, but meets resistance at the level of the first shoulder and enters a downtrend.
Volume decreases throughout the pattern formation. As soon as the neckline is broken at the end, one can expect a significant price drop and high trading volume.
Inverse Head an Shoulders
The head and shoulders pattern can occur mirrored in the same way and is then called inverse head and shoulder.
The inverse head and shoulders pattern indicates a change in trend, from an downtrend to a uptrend, i.e. it is a bullish signal.
In the picture you can clearly see how the pattern is formed.
The first shoulder is usually formed after a stronger downward phase, after a short consolidation a new lower low, the “head” is formed. The price rises again to the level of the neckline which serves as a resistance level. In the further course, the chart tries to form a lower low, but meets support at the level of the first shoulder and enters a uptrend.
Volume decreases throughout the pattern formation. As soon as the neckline is broken at the end, one can expect a significant price increase and high trading volume.
Double Top
The double top pattern is a bearish reversal pattern. It is formed by a price bouncing off a horizontal resistance line twice after a prolonged upward move. The pattern often occurs at the end of a bull market.
The formation of the first top is usually accompanied by high trading volume, while volume then decreases until the 2nd top and picks up speed as it bounces down.
Double Bottom
The double bottom pattern is a bullish reversal pattern. It is formed by a price bouncing off a horizontal support line twice after a prolonged downward move. The pattern often occurs at the end of a bear market.
The formation of the first top is usually accompanied by high trading volume, while volume then decreases until the 2nd top and picks up speed as it bounces down.
Bilateral Pattern
In a bilateral pattern, the price can continue its trend or complete a trend reversal. This can not be clearly determined by the price trend alone but only by additional indicators such as the trading volume or the RSI.
With bilateral patterns, it is important to set your stop loss tightly and to act quickly, should the price run in the other direction as predicted.
Ascending Triangle
An ascending triangle is usually considered a continuation pattern, and is a bullish signal. In rare cases, it also occurs as a trend reversal pattern at the end of a downtrend.
In contrast to the ascending wedge the ascending triangle is characterized by a horizontal resistance line and an ascending support line below it. The chart indicates accumulation, i.e. there are more buyers than sellers in the market which eventually leads to the horizontal resistance line being broken to the upside.
The volume continues to decrease during the pattern formation and increases sharply as soon as the resistance is broken.
Descending Triangle
An descending triangle is usually considered a continuation pattern, and is a bearish signal. In rare cases, it also occurs as a trend reversal pattern at the end of a uptrend.
In contrast to the descending wedge the ascending triangle is characterized by a horizontal support line and an declining resistance line above it. The chart indicates distibution, i.e. there are more sellers than buyers in the market which eventually leads to the horizontal support line being broken to the downside.
The volume continues to decrease during the pattern formation and increases sharply as soon as the support line is broken.
Symmetrical Triangle
A symmetrical triangle is defined by symmetrically converging support and resistance lines and represent a consolidation phase.
Bulls and bears fight for the further chart formation, the volatility, i.e. the price fluctuation decreases more and more. Higher lows and lower highs follow. Just before the end of the triangle, there is usually an explosive breakout from the chart pattern either upwards or downwards.
The volume decreases steadily during the chart formation and increases sharply at the breakout.
