Chart Patterns

For Reddit Noobs

• The ascending triangle is a bullish continuation chart pattern that identifies that a

potential break of resistance is likely once the support and resistance lines converge

(come together). An ascending triangle is based on higher lows until resistance is

broken. To draw this pattern, a horizontal line must be placed at the resistance level,

and an ascending line drawn at the support level to signify an uptrend.

• The descending triangle is essentially a reverse of the ascending triangle. Unlike the

ascending triangle, the descending triangle conveys a bearish downtrend due to

lower highs. The support line is horizontal, and the resistance line is sloped

downwards (descending) to signify the possibility of a downtrend breakout.

• For a symmetrical triangle, two trend lines start to meet as the price consolidates

which signifies a potential breakout in either an up or down direction. The support

line is drawn with an upward trend (higher lows) and the resistance line is drawn

with a downward trend (lower highs). Even though the breakout has the potential

to move in either direction, it will often follow the general trend of the market.

Therefore, it can be useful to use more than one timeframe to get a better

understanding of the market’s direction.

• The bull flag pattern is found in stocks with strong uptrends, they are called bull

flags since their pattern resembles a flag on a pole. The pole is a result of a vertical

rise and the flag is a result of a consolidation period. The flag is typically angled

down away from the prior trend. This consolidation period is often used to identify

the potential continuation of the previous trend.

• The ideology behind the bear flag is a reflection of the bull flag, only the bear flag

favors a bearish downtrend as opposed to an uptrend. Once the downtrend reaches

its apex, there is a phase of consolidation before typically following its momentum

downward.
 The Wedge

• The wedge demonstrates a tightening of price movement between the resistance

and support lines. The trend can either be upward, or downward. Unlike the

triangle patterns, there are no horizontal lines in a wedge. The support and

resistance lines tend to run in close parallel with one another either up or down.

The wedge is usually seen as a reversal pattern, meaning that once the movement

consolidates, a downward trending wedge tends to breakout upwards, and an

upward trending wedge tends to breakout downwards.

• A double bottom resembles the letter ‘W’ making the pattern more memorable

than others. This pattern indicates when the price has failed to break the support

line twice, resulting in the market price moving to an uptrend for a certain period

of time. Like the wedge, this is a reversal pattern.

• Opposite to the double bottom, the double top resembles the letter ‘M’ and

signifies the market price could enter a reversal phase because it has failed to

break the resistance line twice. The trend follows back to the support line and

begins a downward trend breaking through the support line.

• The head and shoulders pattern attempts to predict a bull to bear market reversal.

It is characterised by a large peak in the middle of two smaller peaks either side of

it. All three levels fall back to the support line and the trend is likely to breakout in

a downward motion. The opposite of this pattern is called ‘Inverted Head and

Shoulders’.
 Rounding Bottom

• The rounding bottom pattern usually indicates a bullish upward trend. Traders

have the opportunity to buy in the middle of the ‘U’ shape in order to capitalise on

the upward trend that follows as it breaks through resistance levels.

• The Cup and Handle is a continuation stock chart pattern that signals a bullish

upward trend. It is the same as the Rounding Bottom, however it features a

‘handle’ after the rounding bottom has taken shape. This handle resembles the

‘flag’ from the above-mentioned bull and bear flag patterns. Once the handle is

completed, it is typical for the market to breakout in a bullish upward trend.

• The Hammer pattern has a short body and long lower wick, this candle type

demonstrates that sellers had entered the market at this point, however the selling

has been absorbed due to the buyers. Hammers do not indicate a price reversal to

the upside until is is confirmed. Confirmation arises if the candlestick after the

hammer closes at a higher price than the hammer did. Traders do not tend to use

hammers alone as an indication of price direction; trend analysis, price, and

technical indicators can be used alongside it for further confirmation.

• A Shooting Star is a bearish candlestick with a long upper wick and small body.

Shooting Stars appear after an uptrend, in order to be considered a shooting star,

the formation must appear after a price advancement. The Shooting star indicates

a possible price reversal and is most affective when it is followed by three or more

consecutive rising candles with higher highs. The candle that forms after the

Shooting Star is what gives confirmation to its tendency to reverse price

movement. The next candle’s high must stay below the high of the Shooting Star

and then close below closing price of the Shooting Star. If this happens, it can be a

great indication of a reversal and begin a downward trend.

• A Bullish Engulfing is a green candlestick that opens below and closes above the

previous red candle. A Bullish Engulfing candle can signify an upward movent from

the next candle and a reversal. It is important for traders not to base any decision

of an engulfing candle alone however. It is cruciala to refer to previous trends and

different timeframes to see the bigger picture.

• A Bearish Engulfing pattern is the opposite to a bullish one, the engulfing candle is

red and opens above and closes below the previous green candle and can signify

the coming of a downward trend. Just like the Bullish Engulfing, it is important to

look at longer timeframes to get a better understanding of the current trend in the

stock.