Table of Contents

4 Introduction to technical analysis

6 Why chart patterns should be considered
8 Candlestick charts
10 Popular time frames

The 10 chart patterns you should know

11 Pattern 1 — Head and shoulder
Disclaimer 12 Pattern 2 — Inverse head and shoulders
Information and strategies contained in this book are intended as educational information 13 Pattern 3 — Double bottom
only and should not be treated as advice or a recommendation to trade nor used as a
sole trading guide. For practical application and further learning, explore Deriv 14 Pattern 4 — Double top
Academy. The past is not a guide to future performance, and strategies that have
worked in the past may not work in the future. Trading derivative products involves a 15 Pattern 5 — Cup and handle
high level of risk and may not be suitable for all customers. The value of any trade,
and the income derived from it, can go down as well as up, and your capital is at risk. 16 Pattern 6 — Rounding top
Although due care has been taken in preparing this document, we disclaim liability for
any inaccuracies or omissions. 17 Pattern 7 — Rounding bottom

Deriv is the manufacturer and distributor of its products. Products offered on deriv.com 18 Pattern 8 — Ascending triangle
are considered complex derivatives and may not be suitable for retail clients. CFDs are
complex instruments and come with a high risk of losing money rapidly due to leverage. 19 Pattern 9 — Descending triangle
70.78% of retail investor accounts lose money when trading CFDs with this provider. 1
You should consider whether you understand how CFDs work and whether you can
20 Pattern 10 — Wedges rising and falling
afford to take the risk of losing your money.
21 Summary and next steps
The information presented is intended for retail and professional clients.
22 Frequently asked questions
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Chart Patterns Every Pro Trader should know Vince Stanzione

Introduction to technical analysis Garbage in, garbage out — the importance of good data feeds
There are hundreds of chart formations and technical indicators. Volumes have been written on It’s worth remembering that as technical analysis relies purely on data (numbers), your data feed
the subject, some good and many long, confusing and contradictory. My aim here is to give you should be clean, and you must be aware of data spikes or data issues. If the price is 11,12,13 and
10 chart patterns that you will encounter in everyday trading, whether you are trading stocks, then the next price is 100, it is likely to be a data issue. The charting package, in most cases, will
commodities, forex, synthetics, or cryptocurrencies. You will find that these patterns have not know, so that is where your common sense has to take over.
historically appeared and can consider them in making your trading plan.
It’s also worth noting that “illiquid markets” — those of stocks or financial products that do not
trade actively — are prone to spiking data and unsuitable for chart patterns or technical trading.

Staying with the most liquid markets, such as major currencies, indices, larger cap individual
Disclaimer: There is no guarantee that analysing the market’s past performance, stocks, commodities (major ones are oil and gold), and the major cryptocurrencies can help you
whether on financial or synthetics, can lead to successfully predicting future avoid pricing issues that lead to inaccurate charts.
market movements. These technical analysis tools merely help to understand
how markets move and how such data can be analysed for a betterinformed Good data feeds will normally correct price spikes or erroneous data, but this can sometimes
decision when trading. Please remember that trading always involves risk, and
happen hours after the event.
you should consider this when trading.
To study this subject in more details, visit Deriv Academy.

Example of an illiquid stock

Chart patterns are a guide, not a guarantee
It’s important to realise that chart patterns and technical analysis are a guide, not a guarantee. I
would love to tell you that these chart patterns will work every time, but sadly they will not.

The aim is to look for a trading edge, something that helps you make a better trading decision
and, over time, might bring you success in financial markets.

Chart patterns also help reduce emotions in trading, giving you a roadmap as to when to enter
a trade and, more importantly, when to exit. In a fast-moving market — especially if a trade is
moving against your prediction — logic and common sense can go out of the window, so having a
trading plan and being aware of what pattern a market adopts can really help your trading results
since you’ll then be in a better position to recognise a losing trade and let go of it.

The word market in this book can easily refer to a forex pair, stock, index, or cryptocurrency.

Here we see many gaps and days when the stock does not trade. This is not a suitable stock for using
chart patterns.

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Chart Patterns Every Pro Trader should know Vince Stanzione

What is technical analysis?

Technical analysis ignores the news and economic data, focusing purely on price trends and
volume. It primarily involves studying chart patterns, showing the trading history and statistics for
whatever market is being analysed.

Even traders who prefer a fundamental analysis driven by company news, earnings, and valuation
ratios sometimes use technical analysis afterwards to determine a good entry price.

We would start with a basic price chart which would show the market trading price in the past,
and look for a trend or pattern that could help determine future pricing.

In this guide, I am skipping over indicators and tools such as Moving averages, RSI or MACD and
only focusing on actual chart patterns.

Of course, technical indicators can also be combined with chart patterns.

Why chart patterns should be considered

If I showed you a spreadsheet of prices in numbers, chances are you will not see a pattern;
however, if those same numbers are displayed in a chart, it is far easier to make sense of what is
happening in a market.

Chart patterns put all buying and selling that’s happening in a financial market into a concise
picture. It is possible to see buyers (bulls) and bears (sellers) take or lose control of a market.
This can help you to identify a trend reversal.

Chart patterns are a pure expression of what is going on in the underly market. You or I could
think something is overvalued or undervalued, but a chart pattern is purely price-driven.

Chart patterns tend to repeat themselves over and over again, which helps to appeal to human
psychology and trader psychology in particular. It is common to see a market move to a round
number or find support at a previous price level.

Thanks to the internet, it’s now easier than ever to find chart patterns. Many sites will offer
screeners which allow you to filter for chart patterns. I use finviz.com

As you can see, I can select major patterns and then see all the stocks that meet that criteria.

“
“
Source: finviz.com
Here I can screen chart patterns, saving hours of manual screening.
A picture tells a 1,000 words Before diving into individual chart patterns, let’s first learn more about charts and timeframes.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Candlesticks charts
In the chart patterns used in this ebook, we will use candlestick charts, presumably developed Here we see an example of Tesla (TSLA) using a candlestick chart where each bar represents
in the 18th century by the legendary Japanese rice trader Homma Munehisa. The charts gave one day of trading, green the stock closed up and red the stock closed down. This is the raw
Homma and others an overview of open, high, low, and close market prices over a certain period. chart to which we can add chart patterns and indicators, as I shall explain further in the ebook.
This method of charting prices proved to be particularly interesting and helpful due to its uncanny Source: TradingView.
ability to display five data points at a time instead of just one. Charles Dow picked up the method
circa 1900, and today’s financial market traders still widely use it.

Candlesticks are usually composed of a body and wick. The body, typically shaded in black/red
or white/green, illustrates the opening and closing trades. The wick, consisting of an upper and
lower shadow, shows the highest and lowest traded prices during the time interval represented.
If the asset has closed higher than it opened, the body is white or green. The opening price is
at the bottom of the body. The closing price is at the top. If the asset has closed lower than
it opened, the body is black or red. The opening price is at the top. The closing price is at the
bottom. A candlestick need not have either a body or a wick.

The most common colours — and the ones I use — are red for a down candle and green for an
up candle. White for an up candle and black for a down candle are also used, a custom that goes
back to the days of printing out charts in black and white.

High High

Close Open

Open Close

Low Low Log in to your account to practice as you learn

Bullish Bearish
candlestick candlestick
Open Deriv Trader Open Deriv MT5
deriv.com/dtrader deriv.com/dmt5

Open Deriv X 2 Open Deriv cTrader 3

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Chart Patterns Every Pro Trader should know Vince Stanzione

Popular time frames 10 Chart patterns you should know

Depending on what time frame you look at, the market may give contradictory buy and sell
patterns. For example, if you look at the S&P500 on a 1-minute chart it will look very different to Pattern 1
the S&P500 on a 1-day, 1-week, or 1-month chart. Head and shoulders

1 minute
a very short term — is a time frame that gives many buy and sell signals. Since it is oversensitive,
it can lead to false signals. The advantage is that signals react to market moves very quickly.
Therefore, there is little lag time.

1 hour
is a popular time frame and helps reduce the oversensitivity issues of a 1-minute chart.

1 day
is the most commonly used time frame and the one I mainly use. Each candle on a 1-day chart
represents a trading day. It is suitable for those not watching a screen all day, doesn’t have the
oversensitivity of shortterm movements, and catches all major trend changes.

1 week

is a time frame that allows you to see a longer-term pattern. Of course, it’s more delayed and not
as responsive, but it can provide a good picture of a longer-term trend.

1 month

is a time frame that gives you a longterm view of a market with years of data being visible on a
chart. One-month chart patterns often signal a serious trend change. The popularity of this pattern is mainly attributed to the fact that it is easier to spot than
other patterns.
There are other time frames, but these tend to be the main ones I use. The examples in this
ebook are based on daily charts unless stated otherwise, but they can also be used on short The head and shoulders pattern tries to predict a reversal. Characterised by a large peak
or longer-term charts. with two smaller peaks on either side, all three levels fall back to the same support level
as the neckline. The trend is then likely to break out in a downward motion. Its name
o tudy thi u ect in more detail , vi it Deriv Academy. comes from what the pattern looks like: a head and two shoulders (and a neckline).

With this pattern, you would enter a short or sell trade below the neckline and a stop
around halfway between the second shoulder. The target move would be around the
distance between the head (peak) and neckline.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Pattern 2 Pattern 3
Inverse head and shoulders Double bottom

The inverse head and shoulders or reverse bottom is a bullish pattern and indicates that A double bottom looks similar to the letter W and indicates when the price has made two
sellers have been exhausted. You would enter a long trade just above the neckline and a stop unsuccessful attempts at breaking through the support level. It is a reversal chart pattern as
towards the recent low of the second shoulder. The target would be a continuation of the it highlights a trend reversal. After unsuccessfully breaking through the support twice, the
head move giving a fairly good risk-to-reward potential. market price shifts towards an uptrend. You will also see triple bottoms play out.

Here we see the initial decline and attempt to rally, a second decline, which does not go
below the first decline, forming support. You would buy just above the neckline and stop
towards the middle of the up move, with a target at the same level that the initial decline
started at.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Pattern 4 Pattern 5
Double top Cup & handle

Opposite of a double bottom, a double top looks like the letter M. The trend enters a reversal The cup and handle is a continuation stock chart pattern that signals a bullish market trend.
phase after failing to break through the resistance level twice. If the price fails to move It is the same as the rounding bottom or saucer (also a pattern worth looking out for) but
higher, then it is likely to go back to the neckline, which is support. If it fails there, it will move features a handle after the rounding bottom. The handle resembles a flag or pennant and once
lower back down to the lows of the recent move. In this type of setup, you would look to take completed, you can see the market break out in a bullish upwards trend.
a short trade with a stop above the neckline, and your target would be the recent lows.
The handle is a temporary retracement pattern and breaks out to continue the move higher.
It’s worth adding that you will also find multiple bottoms (support) or tops (resistance) in
markets, so you could see a triple top or triple bottom. This pattern can be fairly rare and takes time to complete; however, the upside move can be
fairly explosive. The move-up is often the same distance as the cup height, so once the handle
completes the next move higher, it gives us a target move of the same distance as the cup.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Pattern 6 Pattern 7
Rounding top Rounding bottom

A rounding top usually indicates a bearish downward trend. It tends to show that the market The flip side of the rounding top is the rounding bottom, which is a bullish pattern. The market
is losing strength, with each high being lower than the previous one. We then see a move is in a downtrend but then starts to make a series of lows, higher than the previous ones, which
through the neckline as support fails, then we see a smaller retest (bounce) back to the form the rounded bottom or saucer. We then break out of the cup and move higher.
neckline before a larger fall. The fall is normally the same distance as the recent high to the
neckline. I have often seen this pattern in cryptocurrencies such as Bitcoin. You would look to buy around the halfway point of the formation of the U shape or once the
breakout occurs.

A rounded bottom can take weeks to form, but you can use a stock screening site to identify
a selection of stocks and markets that make this pattern and add them to your watch list. You
would only open trades once you are heading to the breakout point.

This is very similar to the cup and handle pattern previously covered.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Pattern 8 Pattern 9
Ascending triangle Descending triangle

The ascending triangle is a bilateral pattern meaning that the price could break out from The descending triangle is a bilateral pattern, meaning that the price could break out from
either side. A breakout is likely where the triangle lines converge. To draw this pattern, you either side. A breakout is likely where the triangle lines converge. To draw this pattern, you
need to place a horizontal line (the resistance line) on the resistance points and draw an need to place a horizontal line (the support line) on the support points and draw a descending
ascending line (the uptrend line) along the support points. This pattern shows the price line (the downtrend line) along the resistance points. This pattern is the exact opposite of the
moving into smaller and smaller ranges before the big break out. Your buy entry would be ascending triangle previously covered.
just above the resistance, with a target the same distance as the triangle’s height.
This pattern shows the price moving into smaller and smaller ranges before the big breakout.
For the sell entry, you would do the exact opposite, sell below the support line, and expect a Your sell entry would be just below the support line, with a target the same distance as the
drop of at least the triangle’s height. triangle’s height.

For the buy entry, you would do the exact opposite, buy above the resistance line and expect a
rise of at least the height of the triangle. You can place a stop just below the resistance line.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Pattern 10 Summary and next steps

Wedges: rising and falling
I hope you have found this short guide of value and can use these patterns to help you make
better trades. As stated at the outset, technical analysis and chart patterns are a guide, not a
guarantee. Chart patterns can be viewed as a tool in your trader’s toolbox together with indicators
Rising wedge Falling wedge such as RSI, MACD, and moving averages.

Chart patterns help you keep your trading decisions focused and disciplined, especially in fast-
moving and volatile markets.

Before investing, you can use a demo account to try your new skills without risking any funds.

Most brokers offer a demo account free of charge. You can sign up for a Deriv demo account, for
example, and use their many charts and trading tools.

As for trading software and websites, there are many that will automatically add chart patterns
to a chart and allow screenings. With time, you will be able to spot chart patterns as your eyes
become accustomed to them.

I wish you every success in your trading.

Vince Stanzione

Our final patterns are wedges, and we will deal with rising and falling wedges.
Accumulation Bullish
Accumulation occurs when a stock or market is being This refers to a market that is rising. Someone with a
Rising wedge purchased at higher prices. Stocks positive view of a market would be a Bull.
whose prices are rising are considered to be under
Wedge patterns are normally reversal patterns. A rising wedge occurs when the price makes accumulation. Opposite of distribution. Candlestick charts
multiple swings to new highs, yet the price waves are getting smaller. Essentially, the price A chart that has open, high, low, and close data sets
action is moving in an uptrend, but contracting price action shows that the upward momentum Ask price in a candle form.
The price that you can buy at. Also referred to as buy
is slowing down. Eventually, the price breaks out, and in the case of the rising wedge, the price
or offer price. Opposite of bid price. Charting
moves lower. The study of historical price patterns or actions to
Bearish determine likely future movements.
You would enter a stop just above the wedge, and you would enter short. Place your sell trade This refers to a market in decline. Someone with a
just below. The target would be a move-up of the same distance as the height of where the negative view of a market would be a Bear. Chart patterns
Price patterns are trends that occur in stock
wedge started.
Bid price charts. The patterns form recognisable shapes. The
The price that you can sell at. Also referred to as sell common ones are covered in this ebook.
Falling wedge price. Opposite of ask/offer price.
Continuation patterns
The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move Bilateral pattern Most chart patterns can be broken down into two
The bilateral pattern means that the price could break categories — continuation patterns or reversal
lower. The trading range becomes tighter and tighter until it breaks out. In the case of the
out on either side. An example of a bilateral pattern is patterns. Continuation patterns continue the trend
falling wedge, the price normally breaks higher, so it is a bullish pattern. You would have a stop, an ascending or descending triangle. that was in place prior to the development of the
as shown on the chart just below the wedge. You would buy just as we break out of the pattern continuation pattern. A cup and handle pattern
and then look for a target of the same distance as the height of where the wedge started. Take Breakout covered earlier is a continuation pattern.
care as many confuse a falling wedge with a bearish pattern. A sustained move through a support or
resistance line. As a rule of thumb, this should consist Distribution
of more than one day’s price action. The subsequent Distribution occurs when a stock or market is being
o tudy thi u ect in more detail , vi it Deriv Academy. move can be powerful. A breakdown would be where sold at lower prices. Stocks whose prices are falling
a support area gives way, and the price moves lower. consistently are considered to be under distribution.
It’s the opposite of accumulation.

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Chart Patterns Every Pro Trader should know Vince Stanzione

Downtrend Rounding bottom

A downtrend is a sequence of lower lows and lower Rounding bottom is a chart pattern that shows the
highs. It’s the opposite of an uptrend. gradual base formation and the turn to an uptrend,
especially a good long-term base formation. See also
Head and shoulders rounding top.
Three-pronged chart formation resembles a head
and two shoulders, where the second peak marks the Rounding Top
extreme of the trend. The third peak fails to extend A rounding top usually indicates a bearish downward
beyond the second. The pattern is completed by a trend. It tends to show that the market is losing
break of the “neckline”, signalling a trend reversal. strength, with each high being lower than the
See also the “inverse head and shoulders” chart previous one. We then see a move through the
pattern or market bottoms. neckline as support fails, then we see a smaller retest
(bounce) back to the neckline before a larger fall.
Inverse head and shoulders
The inverse head and shoulders or reverse bottom Screener
is a bullish pattern and indicates sellers have been A piece of software or website that allows you to
exhausted.Characterised by a large peak downwards scan or screen markets or stocks for a set of rules or
with two smaller peaks on either side, all three levels trading patterns. Also known as a filter.
rise back to the same resistance level in the neckline.
The trend is then likely to break out in an upward Sideways trend
motion. Markets that trade in a range are in a sideways trend.
Deriv is one of the world’s largest online brokers. We offer CFDs and other derivatives on
Illiquid markets Support forex, stocks & indices, cryptocurrencies, commodities, and derived indices to millions of
Any market that doesn’t have immediate price A psychological, fundamental, or technical level that registered users across the globe.
discovery, volume, or wide bid/ask spreads is an limits selling in a stock or market. Often described
illiquid market. Basically, an illiquid market is the as a point where there are more buyers than sellers. From inception, our goal was to break free of the high commissions and clunky products
absence of liquid assets. Support is seen as a floor in the price and is the offered by traditional brokers. Also, we aim to deliver a first-class experience to digitally
opposite of resistance. inclined traders, regardless of the size of their accounts.
Moving average
The average price of a stock/market over any given Technical analysis In a journey spanning more than 23 years, we have grown to over 2.5 million customers
(rolling) period of time. It is used primarily as an Technical analysis is the study of historical price worldwide. But our mission has remained the same:
indication of a trend and is less useful in rangebound action to determine future movements, usually with
markets. A moving average is usually plotted at the the use of charts. It’s the opposite of fundamental Make trading accessible to anyone, anywhere
end of the time period covered but can be centred or analysis.
shifted as required.
Triangle pattern
Resistance The triangle pattern is in the form of a triangle.
A level where sellers are found. Usually plotted as a
horizontal line touching previous highs. Can appear at Uptrend
psychological levels, i.e. big round numbers such as An uptrend is a sequence of higher highs and higher
$100 or $1,000. Resistance can be seen as a ceiling, lows. It’s the opposite of a downtrend.
and it’s the opposite of support.

Reversal patterns 10 Chart Pattern

Reversal patterns reverse the trend that was in place Download Here
prior to the development of the reversal pattern.

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