A chart pattern is a formation on a price chart that indicates potential future price movements based on historical trends. These patterns form the foundation of technical analysis, requiring traders to accurately identify and interpret them.
While chart patterns are essential for technical analysis, they can be challenging to master. To assist you in understanding them better, here are 11 chart patterns every trader should be familiar with.
1. Diamond Trading Pattern
Signals a trend reversal, appearing at market tops or bottoms. In a top scenario, the breakout is calculated by projecting the diamond’s height below the breakout point. A short order is placed once the price drops below this level. High volume confirms the continued price decline.
2. Double Top Pattern
Forms when the price tests the resistance zone twice, encountering overbought conditions. After the 2nd rejection, the price breaks support, signaling a sell. The short target price is the difference between the support and resistance levels.
3. Cup and Handle Pattern
It’s a bullish reversal pattern featuring a U-shaped bottom (the cup) followed by a short downward trend (the handle). It signals a trend reversal and is used to place long positions just above the handle breakout, confirming the bullish momentum.
4. Falling Wedge Pattern
It’s a bullish reversal pattern formed by at least 2 lower highs and 2 lower lows. Regardless of the prior trend, a breakout from the falling wedge indicates a shift toward a bull market, signaling an upward price movement
5. Symmetrical Triangle Pattern
It’s a continuation pattern that can be bullish/bearish based on the prevailing trend. A bullish trend signals a buy. Forming with lower highs and higher lows, it builds momentum until a breakout, which indicates the price target
6. Rounded Bottom Pattern
A rounding bottom chart pattern can indicate either a continuation or a reversal. For example, in an uptrend, an asset’s price might dip slightly before rising again, signaling a bullish continuation. Traders often buy at the low point of the rounding bottom and profit from the price increase once it breaks above a resistance level.
7. Descending Triangle Pattern
It signals a bearish trend continuation, forming from a bearish trend with price finding linear support and trending horizontally, creating lower highs. Momentum builds until a breakout occurs, leading to a significant price drop upon completion
8. Rising Wedge Pattern
It’s highly bearish, formed by at least 2 higher highs and 2 higher lows. It can indicate a slow continuation of a bearish trend or a reversal of a bullish trend. A breakout from this pattern typically leads to a bear market. Shorts should be placed under the breakout zone, targeting the wedge’s opening.
9. Ascending Triangle Pattern
It signals a bullish trend continuation. Formed by at least 2 higher lows and 2 linear highs, it originates from a macro uptrend. A breakout from this pattern indicates the resumption of the uptrend, often accompanied by a significant rise in price and volume.
10. Rectangle Pattern
A variation of the triangle technique occurs within a trend where a price oscillates between 2 horizontal support/resistance lines. It predicts a continuation of a current trend, bullish/bearish; typically generates less momentum than triangle pattern.
11. Triple Bottom Pattern
Forms after a downtrend when the price finds support 2, creating 2 distinct lows. A significant bounce follows, breaking through resistance and reversing the trend. The profit target equals the height between the support/resistance zones, similar to the double-top pattern.
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