Mastering chart patterns - How to use them in trading!Chart patterns are visual formations created by the price movements of a financial asset—like a stock, currency, or cryptocurrency, on a price chart. Traders use these patterns in technical analysis to predict future market direction based on historical behavior. The main chart patterns are the reversal and continuation patterns.
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What will we discuss?
- Bullish reversal patterns
- Bearish reversal patterns
- Bullish continuation patterns
- Bearish continuation patterns
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Bullish reversal patterns:
Double bottom
A double bottom in trading is a bullish reversal pattern that signals the potential end of a downtrend and the beginning of an uptrend. It forms when the price of an asset falls to a low, bounces back up, then drops again to roughly the same low before rising once more. This creates a "W" shape on the chart.
How to trade it:
Before entering a trade, wait for the price to break back above the neckline with strong volume, as this indicates a potential bullish reversal. Once the breakout is confirmed, look for an entry on the pullback to the neckline.
Inverted head and shoulders
An inverted head and shoulders is a bullish reversal pattern that typically forms after a downtrend and signals a possible shift to an uptrend.
It consists of three parts:
* The left shoulder, where the price makes a low and then bounces.
* The head, which is a deeper low followed by another bounce.
* The right shoulder, a higher low similar in level to the left shoulder.
How to trade it:
Before entering a trade, wait for the price to break above the neckline with strong volume, as this confirms the pattern and signals a potential upward move. After the breakout, it's important to wait for a retest of the neckline to look for an entry. Traders typically place a stop-loss just below the right shoulder to manage risk.
Falling wedge
A falling wedge is a bullish chart pattern that often signals a potential reversal or continuation of an uptrend, depending on where it forms in a price trend.
It appears when the price is moving lower but within a narrowing range, creating two downward-sloping, converging trendlines. Both the highs and lows are falling, but the lower highs are coming down faster than the lower lows, which shows that selling pressure is losing strength over time.
How to trade it:
Wait for the falling wedge to break above the downward trendline and for the price to reclaim the most recent lower high. A breakout alone isn’t always reliable, sometimes the price moves briefly above the trendline without making a higher high, resulting in a fake-out. To confirm the move, wait for a clear higher high and then look to enter on the retracement that follows.
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Bearish reversal patterns
Double top
A double top is a bearish reversal pattern that signals a potential shift from an uptrend to a downtrend.
It forms when the price reaches a high, pulls back, then rallies again to the same or similar high but fails to break above it. This creates an "M" shape on the chart. The neckline is the support level at the low point between the two peaks. When the price breaks below this neckline with strong volume, it confirms the pattern and suggests that selling pressure is taking over.
How to trade it:
Before entering a trade, wait for the price to break below the neckline with strong volume, as this indicates a potential bearish reversal. Once the breakout is confirmed, look for an entry on the pullback to the neckline.
Head and shoulders
A head and shoulders is a bearish reversal pattern that typically forms after an uptrend and signals a potential shift to a downtrend.
It consists of three peaks:
* The left shoulder, where the price rises and then falls.
* The head, which is a higher peak followed by another decline.
* The right shoulder, a lower high that is roughly equal in height to the left shoulder.
How to trade it:
Before entering a trade, wait for the price to break below the neckline with strong volume, as this confirms the pattern and signals a potential downside move, After the breakout, it’s important to wait for a retest of the neckline to look for an entry. Traders typically place a stop-loss just above the right shoulder to manage risk
Rising wedge
A rising wedge is a bearish chart pattern that often signals a potential reversal or continuation of an downtrend, depending on where it forms in a price trend.
It appears when the price is moving higher but within a narrowing range, creating two upward-sloping, converging trendlines. Both the highs and lows are rising, but the highs are increasing at a faster rate than the lows. This suggests that buying pressure is weakening over time, and the market may be preparing for a downturn.
How to trade it:
Wait for the rising wedge to break below the upsloping trendline and for the price to reclaim the most recent high low. A breakout alone isn’t always reliable, sometimes the price moves briefly below the trendline without making a lower low, resulting in a fake-out. To confirm the move, wait for a clear lower low and then look to enter on the retracement that follows.
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Bullish continuation patterns
Bullflag
A bull flag is a continuation pattern that signals the potential for a price to continue moving upward after a brief consolidation or pullback.
It forms when the price experiences a strong upward move (the flagpole), followed by a period of consolidation or a slight downward movement (the flag). The flag typically slopes downward or moves sideways, and the consolidation phase usually occurs within two parallel trendlines, creating a rectangle or slight downward channel.
How to trade it?
Before entering a position, wait for the price to break above the downsloping trendline and establish a higher high. If the price doesn’t make a higher high, it could be a fake-out. Once a higher high is confirmed, look for an entry on the retracement. The target is typically the length of the flagpole projected upward from the breakout point.
Bullish pennant
A bullish pennant is a continuation pattern that indicates the potential for a price to continue its upward trend after a brief consolidation. It forms when a strong upward move (the flagpole) is followed by a period of consolidation, where the price moves within converging trendlines, creating a small symmetrical triangle or pennant shape. The consolidation typically shows lower highs and higher lows, and the pattern suggests that the market is taking a "breather" before continuing its upward momentum.
How to trade it?
Before entering a position, wait for the price to break above the downsloping trendline and establish a higher high. If the price doesn’t make a higher high, it could be a fake-out. Once a higher high is confirmed, look for an entry on the retracement. The target is typically the length of the flagpole projected upward form the breakout point.
Ascending triangle
An ascending triangle is a bullish continuation pattern that typically forms during an uptrend, signaling that the price is likely to continue moving higher.
It is characterized by a horizontal resistance line at the top, formed by a series of peaks at roughly the same price level, and an ascending support line at the bottom, formed by higher lows. This creates a triangle shape, where the price is gradually compressing between the horizontal resistance and the rising support.
How to trade it?
Before entering a position, wait for the price to break above the horizontal resistance level with strong volume. Once the breakout occurs, look for an entry on the retracement back to this area.
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Bearish continuation patterns
Bearflag
A bear flag is a bearish continuation pattern that suggests the price is likely to continue moving downward after a brief consolidation or upward pullback.
It forms when there is a strong downward move (the flagpole), followed by a period of consolidation or slight upward movement (the flag). The flag typically slopes upward or moves sideways, and the consolidation occurs within two parallel trendlines, creating a rectangular or upward-sloping channel. This pattern shows that, despite the short-term pullback, the overall downtrend remains intact.
How to trade it?
Before entering a position, wait for the price to break below the upsloping trendline and establish a lower low. If the price doesn’t make a lower low, it could be a fake-out. Once a lower low is confirmed, look for an entry on the retracement. The target is typically the length of the flagpole projected downward for the breakout point.
Bearish pennant
A bearish pennant is a bearish continuation pattern that signals a potential continuation of a downtrend after a brief consolidation.
It forms when there is a strong downward move (the flagpole), followed by a period of consolidation where the price moves within converging trendlines, creating a small symmetrical triangle or pennant shape. The consolidation typically shows lower highs and higher lows, indicating that the price is taking a pause before continuing its downward movement.
How to trade it?
Before entering a position, wait for the price to break below the upsloping trendline and establish a lower low. If the price doesn’t make a lower low, it could be a fake-out. Once a lower low is confirmed, look for an entry on the retracement. The target is typically the length of the flagpole projected downward for the breakout point.
Descending triangle
A descending triangle is a bearish continuation pattern that typically forms during a downtrend, indicating that the price is likely to continue moving lower after a period of consolidation.
The pattern is characterized by a horizontal support line at the bottom, formed by a series of lows at approximately the same price level, and a descending resistance line at the top, formed by a series of lower highs. The price contracts between these two trendlines, creating a triangle shape with a downward-sloping upper boundary and a flat lower boundary.
How to trade it?
Before entering a position, wait for the price to break below the horizontal support level with strong volume. Once the breakout occurs, look for an entry on the retracement back to this area.
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