Best chart patterns

1. Head and shoulders

2. Double top

3. Double bottom

4. Rounding bottom

5. Cup and handle

6. Wedges

7. Pennant or flags

8. Ascending triangle

9. Descending triangle

10. Symmetrical triangle

There is no one ‘best’ chart pattern, because they are all used to
highlight different trends in a huge variety of markets. Often, chart
patterns are used in candlestick trading, which makes it slightly
easier to see the previous opens and closes of the market.

Some patterns are more suited to a volatile market, while others are

less so. Some patterns are best used in a bullish market, and
others are best used when a market is bearish.

That being said, it is important to know the ‘best’ chart pattern for
your particular market, as using the wrong one or not knowing
which one to use may cause you to miss out on an opportunity to
profit.

Before getting into the intricacies of different chart patterns, it is

important that we briefly explain support and resistance levels.
Support refers to the level at which an asset’s price stops falling
and bounces back up. Resistance is where the price usually stops
rising and dips back down.

The reason levels of support and resistance appear is because of

the balance between buyers and sellers – or demand and supply.
When there are more buyers than sellers in a market (or more
demand than supply), the price tends to rise. When there are more
sellers than buyers (more supply than demand), the price usually
falls.

As an example, an asset’s price might be rising because demand is

outstripping supply. However, the price will eventually reach the
maximum that buyers are willing to pay, and demand will decrease
at that price level. At this point, buyers might decide to close their
positions.

This creates resistance, and the price starts to fall toward a level of
support as supply begins to outstrip demand as more and more
buyers close their positions. Once an asset’s price falls enough,
buyers might buy back into the market because the price is now
more acceptable – creating a level of support where supply and
demand begin to equal out.

If the increased buying continues, it will drive the price back up

towards a level of resistance as demand begins to increase relative
to supply. Once a price breaks through a level of resistance, it may
become a level of support.

Types of chart patterns

Chart patterns fall broadly into three categories: continuation
patterns, reversal patterns and bilateral patterns.

 A continuation signals that an ongoing trend will continue

 Reversal chart patterns indicate that a trend may be about to

change direction

 Bilateral chart patterns let traders know that the price could
move either way – meaning the market is highly volatile

For all of these patterns, you can take a position with CFDs. This is
because CFDs enable you to go short as well as long – meaning
you can speculate on markets falling as well as rising. You may
wish to go short during a bearish reversal or continuation, or long
during a bullish reversal or continuation – whether you do so
depends on the pattern and the market analysis that you have
carried out.

Learn more about CFDs

The most important thing to remember when using chart patterns as
part of your technical analysis, is that they are not a guarantee that
a market will move in that predicted direction – they are merely an
indication of what might happen to an asset’s price.

Head and shoulders

Head and shoulders is a chart pattern in which a large peak has a
slightly smaller peak on either side of it. Traders look at head and
shoulders patterns to predict a bullish-to-bearish reversal.

Typically, the first and third peak will be smaller than the second,
but they will all fall back to the same level of support, otherwise
known as the ‘neckline’. Once the third peak has fallen back to the
level of support, it is likely that it will breakout into a bearish
downtrend.
Double top
A double top is another pattern that traders use to highlight trend
reversals. Typically, an asset’s price will experience a peak, before
retracing back to a level of support. It will then climb up once more
before reversing back more permanently against the prevailing
trend.

Double bottom
A double bottom chart pattern indicates a period of selling, causing
an asset’s price to drop below a level of support. It will then rise to a
level of resistance, before dropping again. Finally, the trend will
reverse and begin an upward motion as the market becomes more
bullish.
A double bottom is a bullish reversal pattern, because it signifies
the end of a downtrend and a shift towards an uptrend.

Rounding bottom
A rounding bottom chart pattern can signify a continuation or a
reversal. For instance, during an uptrend an asset’s price may fall
back slightly before rising once more. This would be a bullish
continuation.
An example of a bullish reversal rounding bottom – shown below –
would be if an asset’s price was in a downward trend and a
rounding bottom formed before the trend reversed and entered a
bullish uptrend.

Traders will seek to capitalise on this pattern by buying halfway

around the bottom, at the low point, and capitalising on the
continuation once it breaks above a level of resistance.

Cup and handle

The cup and handle pattern is a bullish continuation pattern that is
used to show a period of bearish market sentiment before the
overall trend finally continues in a bullish motion. The cup appears
similar to a rounding bottom chart pattern, and the handle is similar
to a wedge pattern – which is explained in the next section.

Following the rounding bottom, the price of an asset will likely enter
a temporary retracement, which is known as the handle because
this retracement is confined to two parallel lines on the price graph.
The asset will eventually reverse out of the handle and continue
with the overall bullish trend.

Wedges
Wedges form as an asset’s price movements tighten between two
sloping trend lines. There are two types of wedge: rising and falling.
A rising wedge is represented by a trend line caught between two
upwardly slanted lines of support and resistance. In this case the
line of support is steeper than the resistance line. This pattern
generally signals that an asset’s price will eventually decline more
permanently – which is demonstrated when it breaks through the
support level.
A falling wedge occurs between two downwardly sloping levels. In
this case the line of resistance is steeper than the support. A falling
wedge is usually indicative that an asset’s price will rise and break
through the level of resistance, as shown in the example below.
Both rising and falling wedges are reversal patterns, with rising
wedges representing a bearish market and falling wedges being
more typical of a bullish market.
Pennant or flags
Pennant patterns, or flags, are created after an asset experiences a
period of upward movement, followed by a consolidation. Generally,
there will be a significant increase during the early stages of the
trend, before it enters into a series of smaller upward and
downward movements.

Pennants can be either bullish or bearish, and they can represent a

continuation or a reversal. The above chart is an example of a
bullish continuation. In this respect, pennants can be a form of
bilateral pattern because they show either continuations or
reversals.

While a pennant may seem similar to a wedge pattern or a triangle

pattern – explained in the next sections – it is important to note that
wedges are narrower than pennants or triangles. Also, wedges
differ from pennants because a wedge is always ascending or
descending, while a pennant is always horizontal.

Ascending triangle
The ascending triangle is a bullish continuation pattern which
signifies the continuation of an uptrend. Ascending triangles can be
drawn onto charts by placing a horizontal line along the swing highs
– the resistance – and then drawing an ascending trend line along
the swing lows – the support.

Ascending triangles often have two or more identical peak highs

which allow for the horizontal line to be drawn. The trend line
signifies the overall uptrend of the pattern, while the horizontal line
indicates the historic level of resistance for that particular asset.

Descending triangle
In contrast, a descending triangle signifies a bearish continuation of
a downtrend. Typically, a trader will enter a short position during a
descending triangle – possibly with CFDs – in an attempt to profit
from a falling market.

Descending triangles generally shift lower and break through the

support because they are indicative of a market dominated by
sellers, meaning that successively lower peaks are likely to be
prevalent and unlikely to reverse.

Descending triangles can be identified from a horizontal line of

support and a downward-sloping line of resistance. Eventually, the
trend will break through the support and the downtrend will
continue.
Symmetrical triangle
The symmetrical triangle pattern can be either bullish or bearish,
depending on the market. In either case, it is normally a
continuation pattern, which means the market will usually continue
in the same direction as the overall trend once the pattern has
formed.

Symmetrical triangles form when the price converges with a series

of lower peaks and higher troughs. In the example below, the
overall trend is bearish, but the symmetrical triangle shows us that
there has been a brief period of upward reversals.

However, if there is no clear trend before the triangle pattern forms,

the market could break out in either direction. This makes
symmetrical triangles a bilateral pattern – meaning they are best
used in volatile markets where there is no clear indication of which
way an asset’s price might move. An example of a bilateral
symmetrical triangle can be seen below.

Chart patterns summed up

All of the patterns explained in this article are useful technical
indicators which can help you to understand how or why an asset’s
price moved in a certain way – and which way it might move in the
future. This is because chart patterns are capable of highlighting
areas of support and resistance, which can help a trader decide
whether they should open a long or short position; or whether they
should close out their open positions in the event of a possible trend
reversal.