Chart patterns can be generically categorized into three groups: bilateral patterns, reversal patterns, and continuation patterns.
The most crucial thing to keep in mind when employing chart patterns in your technical analysis is that they are not a guarantee that a market will move in that anticipated direction; rather, they are only a potential outcome for the price of an asset.
shoulder and head
A head and shoulders chart pattern has two slightly smaller peaks on either side of a huge peak. In order 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 degree of support, or the “neckline,” as a result. It is expected that the third peak will break out into a bearish decline once it has retreated to the level of support.
Another pattern that traders employ to draw attention to trend reversals is a double top. An asset’s price will often reach a peak before declining to a level of support. Then, it will ascend once more before turning around more permanently against the current trend.
A period of selling that caused an asset’s price to fall below a level of support is indicated by a double bottom chart pattern. It will then increase till a point of resistance before declining once more. Finally, as the market turns more positive, the trend will invert and start moving upward.
Because a double bottom signals the conclusion of a downtrend and the beginning of an upswing, it is a bullish reversal pattern.
Both a continuation and a reversal might be indicated by a rounded bottom chart pattern. For instance, an asset’s price during an uptrend may decline briefly before rising again. This would continue the positive trend.
By purchasing halfway around the bottom, at the low point, then profiting from the continuation after it breaks over a level of resistance, traders will attempt to profit from this pattern.
mug with a handle
A bullish continuation pattern called the cup and handle is used to illustrate a period of bearish market sentiment before the general trend finally moves in a bullish direction. The handle and cup resemble wedge patterns, which are discussed in the following 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 as the handle since it is limited to two parallel lines on the price graph. Eventually, the asset will break free of the handle and resume its general bullish trend.
Wedges develop when the price fluctuations of an asset are constrained by two downward-sloping trend lines. Rising and falling wedges are the two varieties.
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.
wedge uptrend pattern
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. As seen in the example below, a falling wedge typically signals that the price of an asset will increase and pass through the level of resistance.
Wedge downtrending pattern
Rising wedges are reversal patterns that indicate a bearish market, whilst falling wedges are more indicative of a bullish market.
Flags or pennants
After an asset experiences 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 series of smaller upward and downward moves.
Pennants can indicate a continuation or a reversal and can be bullish or bearish. An illustration of a bullish continuation is the chart above. Because they exhibit either continuations or reversals, pennants can be viewed in this context as a type of bidirectional pattern.
The ascending triangle represents the continuance of an uptrend and is a positive continuation pattern. A horizontal line can be drawn along the swing highs, the resistance, and an ascending trend line can be formed along the swing lows, the support, to create ascending triangles.
pattern of an ascending triangle
Ascending triangles frequently have two or more peak highs that are identical, making it possible to create the horizontal line. The horizontal line denotes the degree of historical resistance for that specific asset, while the trend line represents the pattern’s overall upward tendency.
A falling triangle, on the other hand, denotes a bearish continuation of a downward trend. In order to profit on a sinking market, a trader typically opens a short position during a descending triangle, maybe using CFDs.
pattern of descending triangles
Because descending triangles are a sign of a seller-dominated market, they typically move lower and break through the support, making successively lower peaks more common and unlikely to reverse.
triangle with equal sides
Depending on the market, the symmetrical triangle formation can be bullish or bearish. In either instance, it is typically 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.
Triangle pattern in symmetry on an upward reverse
The market could, however, break out in either direction if there is no discernible trend before the triangular pattern takes shape. As a result, symmetrical triangles are a bilateral pattern and are best applied in choppy markets where it is unclear which direction the price of an asset will likely move. Below is an illustration of a bilateral symmetrical triangle.