Stock Markets Guides

Author: Stelian Olar

Chart Patterns Cheat

Sheet

Prices in any asset class change every day because of the supply and
demand market forces. These market forces can shape the price

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action into chart patterns that give traders insight into what the
price will do next.

It’s important to understand how these chart patterns come into

play and their role in technical analysis.

The role of chart patterns is to help investors understand prices in

any market in a clear and systematized way.

In price action analysis, trend reversals from bullish to bearish

markets and vice-versa are frequently signaled by chart patterns.

This trading guide will take an in-depth look at chart patterns, the
different types of chart patterns, and how to recognize them across
all time frames.

Table of Contents

What are Chart Patterns 3

Classic Chart Patterns 3
Double Tops 4
Double Bottoms 5
Head and Shoulders Pattern 6
Forex Chart Patterns 7
Bullish Flags 7
Bearish Flags 8
Symmetrical Triangle 9
Stock Chart Patterns 10
Rectangle Patterns 11
Channel Patterns 12
Chart Patterns Cheat Sheet 13
Most Profitable Chart Patterns 14
Lastly 14

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What are Chart Patterns
In technical analysis, chart patterns are unique price formations
made of a single candlestick or multiple candlesticks and result from
the price movement on a chart. Chart patterns can develop across all
time frames and all asset classes.

In other words, candlestick patterns are shown graphically on a price

chart in a way that tells a story about who is winning the bull and
bear battle.

Chart patterns are at the foundation of technical analysis because it

allows traders to shed light on the price action quickly and from just
a couple of candlesticks.

There are two main types of patterns available to price action traders:

● Reversal chart patterns: as the name suggests, reversal

patterns signal a shift in the trend direction. Examples of
reversal patterns include double top and double bottoms or the
head and shoulder.
● Continuation chart patterns: as the name suggests,
continuation patterns signal a continuation of the prevailing
trend. Examples of continuation patterns include the bullish
and bearish pennant, flag pattern, or the ascending triangle.

Furthermore, chart patterns can also be classified as bullish or

bearish. Bullish chart patterns are a potential buy signal, whereas
bearish chart patterns are a potential sell signal.

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Classic Chart Patterns
Before you start risking your money using patterns, it’s important to
learn how to recognize them and get used to the different types of
chart patterns.

The below-mentioned patterns are some of the most popular chart

patterns common with all financial markets.

Without further ado, these are the chart patterns every trader should
learn how to recognize.

Double Tops
The double top price formation is a reversal pattern that signals the
potential end of an uptrend and a new downtrend. This means that
the pattern leads to a decline in price, so we look for selling
opportunities.

The double top resembles the letter “M.”

The double top pattern forms two distinctive highs at roughly the
same price level. The price drops in a corrective way from the first
high before a new failed retest of the first high happens.

The double top pattern is confirmed when the price breaks below
the valley formed between the two highs.

The chart below shows an example of the double top.

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Double Bottoms
The double bottom price formation is a reversal pattern that signals
the potential end of a downtrend and a new uptrend. This means
that the pattern leads to a rise in the price, so we look for buying
opportunities.

The double bottom resembles the letter “W.”

The double bottom pattern forms two distinctive lows at roughly the
same price level. The price rallies in a corrective way from the first
high before a new failed retest of the first low happens.

The double bottom pattern is confirmed when the price breaks

above the peak formed between the two lows.

The chart below shows an example of the double bottom.

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Head and Shoulders Pattern
In technical analysis, the head and shoulders pattern is a bearish
trend reversal pattern that indicates the possible end of an uptrend.
This means that the pattern leads to a decline in price, so traders
need to look for selling opportunities.

The head and shoulder price formation consists of three peaks,

where the middle peak is the highest and the outside two peaks are
close in height. A trendline, also called the “neckline,” can connect
the two valleys formed on either side of the head.

A breakout below the neckline will trigger a sell position and signal
the potential of a trend reversal.

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Forex Chart Patterns
The most commonly used forex chart patterns include the bullish
and bearish flag, different triangle patterns, rectangle patterns, and
many more. Forex chart patterns can vary in complexity, but they all
act as a timing tool to buy or sell currencies.

Bullish Flags
In technical analysis, the bullish flag price formation is a continuation
pattern that signals the pause of an uptrend before the prevailing
trend resumes. This means that the pattern leads to a rise in price, so
traders need to look for buying opportunities. The most reliable
bullish flags can be observed in currency pairs with strong uptrends.

The bullish flag pattern is made of two key elements:

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 1. A pole is depicted by a pre-existing uptrend.
2. The flag, which is depicted by an area of tight consolidation that
shows a counter-trend move. This consolidation can be
contained within two parallel lines of support and resistance.

The buy signal is triggered when the price breaks out of the
consolidation in the direction of the prevailing uptrend.

The chart below shows an example of the bullish flag.

Bearish Flags
The opposite of the bull flag is the bear flag. In technical analysis, the
bearish flag price formation is a continuation pattern that signals the
pause of a downtrend before the prevailing trend resumes. This
means that the pattern leads to a fall in the price, so traders need to
look for selling opportunities. The most reliable bullish flags can be
observed in currency pairs with strong downtrends.

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The bullish flag pattern is made of two key elements:

1. A pole is depicted by a pre-existing downtrend.

2. The flag, which is depicted by an area of tight consolidation that
shows a counter-trend move. This consolidation can be
contained within two parallel lines of support and resistance.

The sell signal is triggered when the price breaks out of the
consolidation in the direction of the prevailing downtrend.

The chart below shows an example of the bearish flag.

Symmetrical Triangle
The symmetrical triangle is a neutral price formation in technical
analysis that doesn’t show a trading bias. Traders will go along with
the direction the price will break.

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Symmetrical triangles can be identified by a resistance line sloping
downwards and a support line sloping upwards.

The support and resistance lines move towards each other until they
converge together. Within the two support and resistance lines, the
price will display a series of lower highs followed by higher lows.

A trader will enter a buy order if the downward sloping trendline is

broken to the upside or enter a sell order if the upward sloping
trendline is broken to the downside.

The chart below shows an example of a symmetrical triangle.

Stock Chart Patterns

This section will outline the most common stock chart patterns and
their key features. The most popular stock chart patterns are the
channels, rectangles, cup with handle, head and shoulders, rounded
tops and bottoms, and many more.

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Rectangle Patterns
In technical analysis, a rectangle price formation is usually a
continuation chart pattern that signals a pause before the
pre-existing trend resumes. However, the rectangle pattern can also
be found at the end of a trend signaling a possible trend reversal.

The rectangle pattern is characterized by the price bouncing

between two horizontal support and resistance lines. Basically, the
price enters a period of consolidation where it’s bounded by two
clear support and resistance lines.

A break above the rectangle pattern is a signal to buy, whereas a

break below the rectangle pattern is a signal to sell.

The chart below shows an example of the rectangle pattern.

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Channel Patterns
In technical analysis, a channel is similar to the rectangle pattern, but
they are identified by the price being contained between an upper
sloping trendline and a downward sloping trendline.

We can distinguish two types of price channels:

1. Bullish channels (ascending channel) where the trend line

slope points upwards.
2. Bearish channels (descending channel) where the trend line
slope points downwards.

Traders who like to trade range-bound markets sell when the price
hits the upper resistance boundary and buy when the price hits the
lower support boundary. Alternatively, traders can also look to trade
on a breakout of the price range.

The chart below shows an example of the channel pattern.

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Chart Patterns Cheat Sheet
To help traders quickly identify the most common price action
pattern requirements, below traders can study the ultimate
candlestick pattern cheat sheet.

Most Profitable Chart Patterns

According to Thomas Bulkowski, the author of “Encyclopedia of
Chart Patterns,” the most profitable chart patterns are the bullish
and bearish flag formations and the head and shoulders pattern.

The flag price formations are regarded as continuation patterns,

whereas the head and shoulders pattern is a reversal pattern.

To determine a high probability chart pattern from a low probability

chart pattern, all chart patterns need to satisfy at least three
conditions:

1. Must develop at the “right location” within the overall trend.

2. The size of the pattern relative to surrounding candlesticks
must be bigger.

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 3. What market conditions (trend, range, or breakout mode).

Lastly
The best way to train your eyes to spot chart patterns is to practice
on a demo trading account. It’s important to keep in mind that while
trading chart patterns are great for understanding what goes behind
the curtain, chart patterns should be used in conjunction with other
forms of technical analysis to assert the overall trend.

Last but not least, don’t expect these price formations to develop in a
textbook-like manner because, more often than not, they will have
slight variations.

Stock Markets Guides

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