There are several factors that traders must consider when buying and selling Futures contracts. Depending on their trading style, some traders may choose to analyze price charts for chart patterns, while others may look at fundamental factors such as expected earnings, seasonality, commodity production costs, etc.
In general, technical analysis and fundamental analysis go hand in hand for successful Futures traders.
Some people build price models and validate them using charts. Others prefer to look at charts first and then validate their ideas by looking at the fundamentals of the asset to see whether they should expect a change in price, a continuation or the formation of a new trend.
In this guide, we will focus on the technical side of analysis. Choosing the right technical analysis tools is essential for building a sustainable and efficient Futures trading strategy.
They can help traders prepare the scenario and get predictions about which direction the market is likely to go.
To help you improve your performance as a trader, we will cover some of the chart patterns most used by experts to define trades, predict future market movements and establish ideal entry and exit points.
References: Viktor Tachev (Earn2Trade)
What are chart patterns?
Chart patterns formed by the prices of futures instruments signal possible transitions between market trends or the continuation of the current trend. Technical traders analyze charts to find patterns created by the instrument's price movements and, based on these patterns, try to determine the market direction.
To do this, they evaluate support and resistance levels to identify possible breakouts or continuation of these levels.
When it comes to Futures trading, besides knowing the patterns and being able to recognize them on the chart, there are some fundamental issues that you should also keep in mind.
Firstly, it is the existence of a stable and well-established previous trend that sets the stage for the next reversal. If the price has not formed a trend and is constantly going up and down, a reversal trend cannot be formed.
It’s also important to note that top patterns are generally shorter and more volatile than bottom patterns. The price swings are much larger, which is why many traders do better in a downtrend.
Last but not least, don't forget this basic rule:
The longer it takes for the pattern to develop and the more volatile the price movement within it, the greater the expected price change when it breaks through support or resistance.”
Chart patterns are best categorized according to their signals. Generally, there are two types of patterns in Futures trading, but some experts argue that there is also a third. Below, we will examine the different patterns and learn more about their characteristics:
Continuity patterns
Continuation patterns are used to identify situations where the established trend will continue its direction. Think of continuation patterns as pauses in the overall trend. This type of pattern is also known as consolidation patterns – or sideways markets. Continuation patterns don’t actually tell you which way to expect a breakout.
Examples of continuation patterns include flags and pennants, wedges, symmetrical triangles, ascending and descending triangles, among others.
Reversal patterns
Reversal chart patterns are the opposite of continuation chart patterns. As the name suggests, they indicate a change in the direction of the prevailing trend when the price starts moving in the opposite direction. For example, if a reversal pattern appears during a downtrend, a trader can expect the market to change direction and start an upward movement.
The change in the direction of the trend does not happen instantly. Before anything else, there is a brief pause, indicating the “fatigue” of either buyers or sellers. During this slowdown, the other group begins to prevail and the trend changes.
Some examples include head and shoulders, double and triple tops and bottoms, among others.
Bilateral standards
Some experts prefer to further divide these patterns by adding an additional category: “bilateral” patterns. Bilateral patterns indicate that the price can move in either direction. Although this group of patterns may seem pointless at first glance, the truth is that bilateral patterns are used by traders who want to have a safety net and place an order at the top and bottom of the pattern. Once one of the orders is triggered, the other is canceled.
Think of bilateral patterns as an indication that the market is highly volatile.
Triangle formations are also part of this group. After analyzing them in detail, you will understand why they can be described as both continuation and bilateral at the same time. The main idea is that triangle patterns do not indicate where the breakout will occur.
Top 10 Most Popular Chart Patterns for Futures Trading
When trading futures contracts, you will come across several types of chart patterns. Some are easier to spot, while others are quite complicated and difficult to analyze. However, if you are just starting out in trading and using technical analysis, we recommend using the most popular and tested patterns in the market.
Below, we present a selection of the top 10 chart patterns for futures trading:
1. Ascending and descending triangles
The ascending triangle pattern is one of the most popular uptrend chart patterns in Futures trading and can help you recognize the breakout of an upward market movement. The pattern forms when the resistance level remains stable and the support level increases.
When analyzing the pattern in the chart below, notice that the price moves up and down within the confines of the triangle as the resistance and support levels converge. When they cross, a breakout of the resistance should occur and an upward movement will form.
You should also look for the inverse pattern: the descending triangle. As its name suggests, it describes a bearish price movement that marks the beginning of a downward trend in the market. The descending triangle pattern is formed when the resistance level falls and the support level remains stable.
When spotting a descending triangle pattern, you should be aware that the future price will rise and fall within the formation until support and resistance levels meet. When this happens, a breakout occurs and then a downward movement forms. Practice shows that the descending triangle pattern is not as common as the ascending triangle.
Another very popular triangle chart pattern is the symmetrical triangle. This pattern indicates a continuation of the previous trend and can be seen when the price consolidates. This type of triangle pattern is called symmetrical because it is formed when the resistance line falls while the support line rises.
When a triangle is formed, the Futures price oscillates within the boundaries of the graphical formation until both trendlines meet. A breakout then occurs, which should continue in the direction of the trend – in some cases, however, the direction may change.
2. Cup with handle
The cup and handle chart pattern is another positive pattern that shows the continuation of the market's upward movement. It is very useful because it marks a pause in the uptrend, entering a brief period of decline and then continuing in an upward movement.
Many traders may mistake this slowdown as a trend reversal event, although it is just a temporary pause in the upward movement.
The pattern is easily recognizable as it resembles a cup with a handle – the cup represents the trend movement, while the handle marks the pause in the trend. However, the market shows many identical price movements on a daily basis, which can often confuse traders.
To confirm that a cup and handle pattern has formed, check for the following events:
First, there is an upward trend;
The trend reaches a limit, followed by strong selling volume;
Sales are interrupted and the movement stabilizes;
New buyers enter and the price approaches the initial resistance level, where the uptrend stopped;
A small deceleration follows, which forms the handle of the pattern;
The trend continues its upward movement, breaking through resistance levels.
The interesting thing about the cup and handle pattern is the way it tests resistance levels. The point at which the pattern is particularly valuable is the formation of the handle. Pay attention to this part of the pattern, as it usually accounts for 30% to 35% of the entire move.
3. Upper and lower diamond
The diamond top pattern indicates a bearish reversal that can trigger a bearish trend in the market. It forms when an upward price trend is followed by a narrowing trend. To identify a diamond top pattern, you need to identify an off-center head and shoulders pattern. Then, draw the support and resistance lines. The shape that forms when all these points are connected resembles a diamond.
The pattern helps indicate the entry point into a short position to avoid entering into an uptrend.
The diamond bottom chart pattern, on the other hand, indicates the beginning of an upward movement in the market and, consequently, the reversal of the downtrend. You can identify it when the price trend widens and then narrows. The procedure for identifying the diamond bottom pattern is similar to its top version: find an off-center head and shoulders pattern and draw the support and resistance lines. Once you find a diamond bottom pattern, you can enter a long position.
4. Double bottom and double top
The double bottom pattern in futures trading occurs at the peak of a bearish market move and usually indicates the beginning of an uptrend. It’s common for traders to have difficulty recognizing the double bottom pattern, which is why it’s essential to understand the mechanics behind its formation. Here are the four steps:
The asset price hits a new low;
It fails to break the support and reaches a higher level, forming a new resistance level;
The price bounces and starts to fall towards the support level, when it starts to rise again;
Price breaks resistance and starts an uptrend
It is also important to note that when an uptrend forms, it is important to watch it, as it is possible that the price will fall back to test the new support level, which was formed at the breakout point.
Generally, the pattern indicates that there is a constant struggle between buyers and sellers. However, buyers come out on top in the end.
The double top chart pattern, on the other hand, marks the peak of an uptrend and can indicate the beginning of a downtrend. This reversal pattern occurs when the following four characteristics are present:
Price hits new high;
Price hits resistance and bounces back towards support;
A series of sales causes the price to oscillate between resistance and support;
Price breaks the support level and sets a downtrend.
The presence of this pattern also indicates a fight between buyers and sellers, but in this case, sellers end up winning. When you find a double top pattern, check the trading volume. It is common for the volume to increase when the price level is below the support.
The double top chart pattern in Futures trading is often confused with the M pattern. The difference is that the latter forms much more aggressive movements and steeper figures.
5. Triple bottom and triple top
The triple bottom and triple top are bullish and bearish reversal patterns, respectively, and indicate when support and resistance levels are tested three times before the price breaks through one of them. This pattern represents a war situation between the buyers and sellers in the market.
In the case of the triple bottom pattern, sellers pull back and buyers' interest pushes the trend upwards. In the case of the triple top pattern, sellers outnumber buyers' intentions, forming a downward movement.
Let’s start with the triple bottom pattern. This bullish reversal pattern occurs when the price of a Futures instrument tests support levels three times and then breaks through resistance. To make sure you’re observing a triple bottom pattern, check for the following events:
Price hits new high;
The trend fails to break the support and returns to the resistance level;
Price starts to retrace to support, only to fail again and rise to resistance level;
The price bounces off the resistance level and starts moving towards the support level;
The trend reverses due to buying interest, breaks the resistance level and forms a downtrend.
The triple top pattern, on the other hand, reverses a downtrend, tests resistance three times unsuccessfully, and then breaks through the support level.
The pattern can be similar to the triple bottom: the price makes a new low, bounces between the trend lines three times, and finally breaks the support and sets a downtrend.
When identifying a triple top pattern, it is essential to keep an eye on trading volume as it tends to increase once the price breaks through a support level – which can later turn into resistance.
You might be wondering what makes this pattern different from the double top version – after all, they are very similar. However, with the triple bottom and triple top patterns, the trader must carefully watch for the moment when the trend breaks through the support or resistance levels.
At this point, the pattern will be fully completed. Otherwise, the price may continue to oscillate between the two lines and distort the trader's perception of the next price movements.
6. Descending and ascending wedge
Another well-known pattern is the wedge. There are two variations of this formation: the falling wedge and the rising wedge. Let’s start with the falling wedge pattern for futures trading. This bullish reversal pattern indicates the end of a downtrend and the beginning of a bull market.
This pattern is based on the fact that when the price starts to fall, the distance between the highs and lows starts to narrow.
This leads to the convergence of support and resistance levels, which leads the price to return to the uptrend. To avoid confusing the rising wedge pattern with another technical indicator, keep an eye on the trading volume. In conjunction with this formation, trading volume tends to increase.
The rising wedge chart pattern, on the other hand, is a bearish reversal pattern that marks the end of an upward movement and the beginning of a bear market. To recognize it, you need to look at the distance between the highs and lows, which in the case of a rising wedge, starts to decrease. The pattern continues until support and resistance levels meet. Once the pattern is complete, it will be followed by a downward movement.
One problem with the rising wedge pattern is that it can be very difficult to recognize. To be sure that a trend reversal is about to occur, it is essential to analyze the trading volume and see if it is decreasing. Additionally, for a rising wedge pattern to occur, there must be a retracement below the 50% Fibonacci level.
7. Flag
One of the most popular patterns for futures trading is the flag, a continuation pattern that resembles a parallelogram. Flag patterns are typically found on intraday time frames and indicate short-term consolidations that confirm strong trends on a larger time frame. Traders look for flag patterns on futures charts to find re-entry opportunities during a market trend.
The pattern is usually formed by trend lines formed by support and resistance levels. Flag patterns are usually observed after a significant price movement and indicate a slowdown in the market. However, soon after the flag pattern is completed, the market returns to the previous trend.
Remember that a flag pattern can appear in both bearish and bullish markets. You should wait for the moment when the price breaks through the support or resistance level – that’s when the pattern is completed. Also, the flag pattern goes in the opposite direction of the initial trend.
8. Regular and inverted head and shoulders
The head and shoulders pattern is one of the most commonly used chart patterns by Futures traders. It is also one of the easiest market patterns to identify when analyzing the chart, as its formation is quite precise. This reversal pattern is very important for indicating a change in the current trend.
The most important thing to identify both types of head and shoulders patterns is to monitor the trading volume, as it can be confusing if the volume is too high. The formation of this reversal pattern helps indicate the point at which the asset will change direction and start moving in the opposite direction of the previous trend.
Traders use the head and shoulders pattern to identify the beginning of a new uptrend. It is worth noting, however, that high trading volumes can disrupt the pattern by forming breakout points. Therefore, be sure to keep an eye on the volume.
The regular version of the head and shoulders pattern indicates the moment when the traded instrument is about to start a downtrend. The pattern has three peaks – a larger one in the middle and two smaller ones on the sides. First, there is a new high, and then the price reaches a new low.
The instrument jumps to an even higher level and then drops to the previous level. The price rises again, but not above the major level, and then falls again. When the price breaks the previous low, the pattern is completed and a downtrend begins.
The inverted version of the head and shoulders pattern, on the other hand, consists of two sideways lows and a higher low in the middle. The mechanics are similar to the regular version: the pattern starts forming as soon as the instrument's price reaches a new low, then bounces back and forms a new high.
Next, we have an even lower low, which takes the price back to the previous high. The pattern continues with the price falling, but not as low as the previous low. It then resumes its upward movement. After breaking the peak point, the pattern is completed and an uptrend begins.
9. Pennant
The pennant chart pattern indicates a situation where support and resistance levels are consolidating. This continuation pattern usually indicates a temporary slowdown in the market, immediately following a notable price movement. After the slowdown, the trend resumes.
It is worth noting that in the case of the pennant indicator, the support and resistance trend lines are not tested multiple times. A buy or sell signal is usually formed the moment the price breaks the trend lines, if there is sufficient volume.
A key issue with the pennant chart pattern is that it always follows a sharp uptrend and indicates a sideways price movement. It is important to note that although the pennant is considered a continuation pattern, it often acts as a reversal pattern, which can confuse traders. This is why it is important to wait for the pattern to confirm and complete. Avoid acting rashly and never rely solely on initial signals.
To easily distinguish a pennant pattern from a wedge pattern, remember that pennants are always horizontal and wider. On the other hand, wedges are either rising or falling and always narrower.
Pennants are also nearly identical to flags. To distinguish the two patterns, remember the only difference between them: the consolidation phase of the pennant has converging trendlines, while the flag pattern has parallel trendlines.
10. Bullish and bearish rectangle
The rectangle chart pattern indicates a period of consolidation just before a price breakout.
The bearish rectangle pattern is initiated after a downtrend and is formed from a price movement between support and resistance lines. It is important to note that the bearish rectangle pattern is capable of breaking out in both directions. After breaking out of one of the levels, a new trend is formed, completing the formation.
To ensure good performance in your operations, when you identify a bearish rectangle pattern, you should sell the instrument when there is a break below the support line or a pullback to the support line – which will act as resistance – right after the break.
The same also applies to the bullish rectangle pattern, with the only difference being that it forms during uptrends. To correctly trade the bullish rectangle pattern, you should buy the instrument when there is a breakout above the resistance and on pullbacks to the resistance level – which will act as support – after the breakout.
Conclusion about graphic patterns
Since trading history repeats itself over and over again, technical analysts have been able to develop advanced trading techniques based on pattern recognition, which has helped to significantly increase the success of futures trading. However, it is worth remembering that none of the chart patterns are perfect. There is no guarantee that they will work every time, which is why technical analysis in futures trading requires a lot of attention from the trader.
If only a few candles are missing, the pattern may be distorted, which will definitely affect the accuracy of your entry and exit points. Always look at other indicators to get confirmation that a particular pattern is indeed forming.
