Complete Guide and how to use chart patterns
Continuation, Neutral, and Reversal Patterns:
1. Continuation Patterns
Continuation patterns indicate that the current trend (uptrend or downtrend) is likely to continue after the pattern completes.
Bullish Flag Pattern: A rectangular consolidation that slopes slightly downwards during an uptrend. Breakout confirms continuation.
Bullish Pennant Pattern: Small symmetrical triangle that forms after a strong upward move. Breakout continues the upward trend.
Bullish Falling Wedge: A narrowing downward-sloping channel that indicates a potential bullish breakout.
Ascending Triangle: Horizontal resistance with rising lows. Breakout above resistance suggests continuation of the upward trend.
Symmetrical Triangle: Converging trendlines form a triangle. Breakout direction indicates future trend direction.
Bearish Flag Pattern: Downward trend pauses in a rectangular pattern. Breakdown below support suggests continuation of the downtrend.
Bearish Pennant Pattern: Small symmetrical triangle following a downward move. Breakdown continues the downtrend.
Bearish Rising Wedge: Upward-sloping narrowing channel in a downtrend. Breakdown signals further bearish movement.
Descending Triangle: Horizontal support with lower highs. Breakdown below support suggests continued downtrend.
Symmetrical Expanding Triangle: Wide, expanding pattern where breakout direction suggests the trend continuation.
2. Neutral Patterns
Neutral patterns can break in either direction and require confirmation to establish the trend.
Symmetrical Triangle: Trendlines converge symmetrically. The breakout can go in either direction and signals the new trend direction.
Symmetrical Expanding Triangle: A widening triangle pattern where the direction of the breakout will indicate future trend movement.
3. Reversal Patterns
Reversal patterns suggest that the current trend is likely to reverse, moving in the opposite direction.
Bearish Double Top: Two peaks at a similar level in an uptrend. Breakdown below support confirms the reversal to a downtrend.
Bearish Head and Shoulders: A peak (head) flanked by two smaller peaks (shoulders). Breakdown below the neckline signals a bearish reversal.
Bearish Rising Wedge: Upward-sloping channel in an uptrend, narrowing over time. Breakdown suggests a reversal to the downside.
Bearish Expanding Triangle: Broadening formation with a bearish bias. Breakdown indicates a reversal to the downside.
Bearish Triple Top: Three peaks at similar levels. Breakdown below the support level confirms the bearish reversal.
Bullish Double Bottom: Two troughs at a similar level in a downtrend. Breakout above resistance confirms a reversal to an uptrend.
Bullish Inverted Head and Shoulders: An inverted peak (head) with two shallower peaks (shoulders). Breakout above the neckline signals a bullish reversal.
Bullish Falling Wedge: Downward-sloping channel in a downtrend, narrowing over time. Breakout suggests a bullish reversal.
Bullish Expanding Triangle: Broadening formation with a bullish bias. Breakout above resistance signals a reversal to the upside.
Bullish Triple Bottom: Three troughs at similar levels. Breakout above resistance confirms the bullish reversal.
Using Chart Patterns for Trading
When using chart patterns in trading:
Wait for Confirmation: Always wait for a confirmed breakout or breakdown to avoid false signals.
Combine with Indicators: Use volume, RSI, or moving averages to confirm the strength of the breakout.
Set Entry and Exit Points: For continuation patterns, enter after breakout confirmation and set stop-loss just below the breakout point. For reversal patterns, enter at the start of the new trend and set a stop-loss near recent highs or lows.
These patterns can help traders predict potential price movements and set up trades accordingly. However, always consider using multiple tools and indicators for a more reliable trading strategy.
