Introduction to Patterns in

Trading
Technical analysis in trading involves studying past price movements and trading volumes to identify
recurring patterns that can predict future price movements. These patterns, known as chart patterns, often
form due to the psychological behavior of traders, resulting in predictable price action. Understanding
these patterns can help traders make informed decisions about when to enter and exit trades, ultimately
improving their trading strategies.
Head and Shoulders Pattern
Description Bias Identification Criteria

The Head and Shoulders Bearish: This pattern signals a 1. Three peaks with the middle
pattern is a bearish reversal potential reversal from an peak being the highest. 2. The
pattern that suggests an uptrend to a downtrend. two lower peaks (Shoulders)
uptrend is coming to an end. It should be approximately the
is characterized by three peaks, same height. 3. A neckline
with the middle peak ("Head") connects the two valleys
being the highest, followed by between the peaks. 4. Price
two lower peaks ("Shoulders"). breaks below the neckline,
confirming the pattern.
Inverse Head and Shoulders Pattern
Description Bias Identification Criteria

The Inverse Head and Bullish: This pattern indicates a 1. Three troughs (lows) with the
Shoulders pattern is a bullish possible reversal from a middle trough (Head) being the
reversal pattern that signals a downtrend to an uptrend. lowest, followed by two higher
potential shift from a troughs (Shoulders). 2. The two
downtrend to an uptrend. It is higher troughs (Shoulders)
essentially the mirror image of should be approximately the
the Head and Shoulders same depth. 3. A neckline
pattern. connects the two peaks
between the troughs. 4. Price
breaks above the neckline,
confirming the pattern.
Double Top and Double Bottom Patterns

1 Double Top 2 Double Bottom 3 Identification Criteria

A Double Top pattern is a A Double Bottom pattern Both patterns require a
bearish reversal pattern is a bullish reversal pattern neckline that connects the
that occurs when price that forms when price two peaks or troughs.
reaches a resistance level reaches a support level Confirmation occurs when
twice, forming two distinct twice, creating two distinct price breaks below the
peaks at roughly the same bottoms at roughly the neckline for the Double
price level. same price level. Top and above the
neckline for the Double
Bottom.

4 Bias
Double Top: Bearish, indicating a potential downward trend reversal. Double Bottom: Bullish,
suggesting a potential upward trend reversal.
Ascending and Descending Triangle
Patterns
1 2 3

Ascending Triangle Descending Triangle Identification Criteria

An Ascending Triangle pattern A Descending Triangle pattern Both patterns are
is a bullish continuation is a bearish continuation characterized by converging
pattern where price is pattern where price is trendlines, with the Ascending
consolidating within a range, consolidating within a range, Triangle having a horizontal
with higher highs and roughly with lower lows and roughly resistance line and the
the same lows. the same highs. Descending Triangle having a
horizontal support line. Price
confirmation occurs when
price breaks above the
resistance line for the
Ascending Triangle and below
the support line for the
Descending Triangle.
Wedge Patterns
Description Bias Identification Criteria

Wedge patterns are Wedges can be either bullish or 1. A wedge pattern is

continuation patterns that bearish, depending on the characterized by converging
indicate the continuation of an direction of the existing trend. A trendlines, creating a wedge
existing trend. They are rising wedge is bearish and a shape. 2. The wedge can be
characterized by converging falling one bullish. either ascending (bullish) or
trendlines, forming a wedge descending (bearish). 3.
shape. Confirmation occurs when price
breaks outside the wedge,
continuing the existing trend.
Flags and Pennants
Flags
1
Flags are continuation patterns that form after a sharp price move. They resemble a flagpole
followed by a rectangular flag.

2 Pennants
Pennants are also continuation patterns that form after a sharp price move. They resemble a
triangular flag.

3 Bias
Both Flags and Pennants can be either bullish or bearish, depending on the direction of the
preceding sharp move.

4 Identification Criteria
1. A sharp price move precedes the formation of the Flag or Pennant. 2. The Flag or Pennant
is characterized by a consolidation period where price moves within a defined range. 3.
Confirmation occurs when price breaks out of the Flag or Pennant, continuing the existing
trend.
Pattern Win Rates
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Analyzing the historical win rates of different chart patterns can provide valuable insights into their
reliability and potential for success. Knowing the typical win rates for patterns allows you to adjust your
trading approach and focus on the most promising setups. Pattern win rates can also help you evaluate the
risk-reward ratio of potential trades, informing your overall risk management strategy.
Patterns in Trading
While the previous slides covered some of the most common chart patterns like Head and Shoulders,
Double Top/Bottom, and Triangles, there are many other pattern types that traders can look for in the
markets. These include Flags, Pennants, Wedges, and various other continuation and reversal patterns.
Studying a wide range of chart patterns can help traders identify potential price movements and make
more informed trading decisions. Many of these patterns and their identification criteria can be found in
online resources and trading education materials.
Conclusion and Key Takeaways
Technical analysis using chart patterns can be a valuable tool for traders, providing insights into potential
future price movements. While patterns are not foolproof and should be used in conjunction with other
indicators and strategies, recognizing and understanding these patterns can help traders make more
informed trading decisions. It is important to note that trading involves risk, and no pattern guarantees
success. Traders should always practice proper risk management and use stop-loss orders to limit potential
losses.