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Chart Pattern

The document discusses 10 common chart patterns traders use to analyze market trends: head and shoulders, double top, double bottom, rounding bottom, cup and handle, wedges, pennants or flags, ascending triangle, descending triangle, and symmetrical triangle. It provides examples of each pattern and describes whether they typically indicate continuation of the trend or a reversal.

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89 views12 pages

Chart Pattern

The document discusses 10 common chart patterns traders use to analyze market trends: head and shoulders, double top, double bottom, rounding bottom, cup and handle, wedges, pennants or flags, ascending triangle, descending triangle, and symmetrical triangle. It provides examples of each pattern and describes whether they typically indicate continuation of the trend or a reversal.

Uploaded by

pndymrigankarka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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01 > HEAD ANND 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.
02 > 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.
03 > 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.
04 > 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.
05 > 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.
06 > 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.
07 > 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.
08 > 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.
09 > 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.
10 > 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.

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