Last updated on April 17, 2023
Chart patterns are an integral aspect of technical analysis. A chart pattern is a shape that begins inside a price chart & aids in predicting what prices may do going forward based on prior performance. Technical analysis based on chart patterns demands a trader to be fully aware of both what they are looking at & what they are searching for.
Because they are all utilised to indicate diverse trends in a wide range of markets, there is no single “best” chart design. ‘Candlestick’ trading frequently employs chart patterns, which marginally improves the visibility of prior market openings and closes. Some patterns work better in a turbulent market than others.
In light of this, it is crucial to understand the “optimal” chart pattern to employ for your specific market, since selecting the incorrect one or being unsure about which one to use might result in you missing out on a chance to make money. It is important that we quickly clarify support and resistance levels before delving into the specifics of various chart patterns. The price often stops climbing and drops back down at resistance.
The balance between buyers and sellers, or demand and supply, is what causes levels of support and resistance to occur. Price also increases when there are more buyers than sellers in a market (or when demand exceeds supply) & it often decreases when there are more vendors than customers (more supply than demand).
As more and more purchasers close their positions, this causes resistance, and the price continues to decline toward a level of support as supply starts to outpace demand. The level of support is reached where supply & demand begins to balance out once the price of an asset has sufficiently decreased. At this point, buyers may choose to enter the market since the item is now more affordable. If the increased buying persists, the price will rise once again reaching a point of resistance as demand starts to outpace supply. The resistance level could change from becoming a level of support as a price passes through it.
Types Of Chart Patterns-
A chart pattern is divided into three categories- bilateral patterns, reversal patterns, & continuation patterns. A continuing trend will continue if there is a continuance. Chart reversal patterns suggest that a trend may be poised to shift. Bilateral chart patterns inform traders that the price may move, either way, indicating a very volatile market.
You may place a trade on any of these patterns using CFDs. This is so that you may speculate on both rising and falling markets as CFDs allow you to go both long and short. Depending on the pattern and the market research you’ve done, you could choose to trade short during a bearish reversal or continuation or longer during a bullish reversal or continuation.
1. Head and shoulders-
Chart patterns known as “head and shoulders” have a high peak surrounded by two smaller peaks. To forecast a bullish-to-bearish reversal, traders look for head and shoulders patterns. The first and third peaks will often be smaller than the second peak, but they will all revert to the same amount of support, or “neckline,” in the process. The third peak will transition into a bearish downturn after it has retreated to the level of support.
2. Double top
Another pattern that traders employ to draw attention to trend reversals is a double top. An asset’s price will often reach a high before declining to a level of support. Then, it will ascend once more before turning around more permanently against the current trend.
3. Double bottom-
A period of selling is indicated by a double bottom chart pattern, which causes the price of an asset to fall below a level of support. Then it will ascend to a point of resistance before falling once again. When the market grows more positive, the trend will eventually change and start moving upward. Because it denotes the conclusion of a downward trend and the beginning of an upward trend, a double bottom is a bullish reversal pattern.
4. Rounding bottom-
A chart pattern with rounded bottoms may indicate both a continuation & a reversal. The price of an asset, for instance, may drop down a little during an uptrend before rising again. This would continue the positive trend. If the price of an asset was in a downward trend and a rounding bottom developed before the trend reversed and started a bullish uptrend, then is an illustration of a bullish reversal rounding bottom.
5. Cup and handle
A bullish continuation pattern called the cup and handle is used to illustrate a period of pessimistic market sentiment before the general trend eventually moves in a bullish direction. The handle and cup resemble wedge patterns discussed in the next section, and a rounding bottom chart pattern, respectively.
The price of an asset will probably experience a brief retracement after the rounding bottom; this retracement is called the handle since it is limited to two parallel lines on the price graph. The asset will break free of the handle and resume its general bullish trend.
Wedges develop as the distance between two sloping trend lines for an asset’s price changes narrows. Wedge shapes come in two varieties: rising and falling.
A trend line wedged between two upwardly sloping lines of support and resistance is an example of a rising wedge. The support line in this instance is steeper than the resistance line. When an asset price breaks through the support level, it usually indicates that the price will eventually decrease more drastically.
Between two levels that are inclined downward is a falling wedge. The line of resistance in this instance is steeper than the line of support. A sinking wedge often signals that the price of an item will increase and overcome the barrier.
7. Pennant or flags
After an asset has a period of upward movement, followed by a consolidation, pennant patterns, or flags, are formed. In most cases, the trend will begin with a substantial gain before degenerating into a succession of minor upward and downward moves.
Pennants can indicate a continuation or a reversal and can be bullish or negative. Because they exhibit either continuations or reversals, pennants may be viewed in this context as a type of bidirectional pattern. It’s vital to keep in mind that wedges are thinner than pennants or triangles, even though a pennant design resembles a wedge pattern or a triangle pattern, both of which are described in the next sections. Additionally, a wedge is either rising or descending whereas a pennant is always horizontal, making wedges different from pennants.
8. Ascending triangle
The ascending triangle represents the continuance of an uptrend and is a positive continuation pattern. To create ascending triangles a horizontal line can be drawn along the swing highs, the resistance, & an ascending trend line can be drawn along the swing lows, the support.
It is possible to create a horizontal line from an ascending triangle if two or more peak highs are similar. The horizontal line denotes the degree of historical resistance for that specific asset, while the trend line represents the pattern’s general upward tendency.
9. Descending triangle
On the other hand, a falling triangle denotes a bearish continuation of a downward trend. In descending triangles, traders usually open short positions to profit from sinking markets. Because descending triangles are a sign of a seller-dominated market, they often go lower and break through the support, making successively lower peaks more common and hard to reverse.
10. Symmetrical triangle
There are two types of symmetrical triangle formations- bullish and bearish. In any instance, it is often a continuation pattern, which indicates that after the pattern has formed, the market will typically keep moving in the same direction as the general trend. When the price converges with a string of lower peaks and higher troughs, symmetrical triangles are formed. The symmetrical triangle in the example below reveals that there has been a brief period of upward reversals even if the general trend is negative.