Chart patterns are an integral aspect of

10 technical analysis, but they require some

getting used to before they can be used
chart effectively. To help you get to grips with
them, here are 10 chart patterns every
pattern trader needs to know. A chart pattern is a
shape within a price chart that helps to suggest

s every what prices might do next, based on what they

have done in the past. Chart patterns are the

trader
basis of technical analysis and require a trader
to know exactly what they are looking at, as
well as what they are looking for.
needs Best chart patterns
to 1. Head and shoulders
know 2. Double top

3. Double bottom

4. Rounding bottom

5. Cup and handle

6. Wedges

7. Pennant or flags

8. Ascending triangle

9. Descending triangle

10. Symmetrical triangle

There is no one ‘best’ chart pattern, because they are all used to
highlight different trends in a huge variety of markets. Often, chart
patterns are used in candlestick trading, which makes it slightly easier
to see the previous opens and closes of the market. Some patterns
are more suited to a volatile market, while others are less so. Some
patterns are best used in a bullish market, and others are best used
when a market is bearish. That being said, it is important to know the
‘best’ chart pattern for your particular market, as using the wrong one
or not knowing which one to use may cause you to miss out on an
opportunity to profit. Before getting into the intricacies of different chart
patterns, it is important that we briefly explain support and resistance
levels. Support refers to the level at which an asset’s price stops
falling and bounces back up. Resistance is where the price usually
stops rising and dips back down. The reason levels of support and
resistance appear is because of the balance between buyers and
sellers – or demand and supply. When there are more buyers than
sellers in a market (or more demand than supply), the price tends to
rise. When there are more sellers than buyers (more supply than
demand), the price usually falls. As an example, an asset’s price might
be rising because demand is outstripping supply. However, the price
will eventually reach the maximum that buyers are willing to pay, and
demand will decrease at that price level. At this point, buyers might
decide to close their positions. This creates resistance, and the price
starts to fall toward a level of support as supply begins to outstrip
demand as more and more buyers close their positions. Once an
asset’s price falls enough, buyers might buy back into the market
because the price is now more acceptable – creating a level of
support where supply and demand begin to equal out. If the increased
buying continues, it will drive the price back up towards a level of
resistance as demand begins to increase relative to supply. Once a
price breaks through a level of resistance, it may become a level of
support.
 Types of chart patterns
Chart patterns fall broadly into three categories: continuation patterns,
reversal patterns and bilateral patterns.

 A continuation signals that an ongoing trend will continue

 Reversal chart patterns indicate that a trend may be about to

change direction

 Bilateral chart patterns let traders know that the price could
move either way – meaning the market is highly volatile

For all of these patterns, you can take a position with CFDs. This is
because CFDs enable you to go short as well as long – meaning you
can speculate on markets falling as well as rising. You may wish to go
short during a bearish reversal or continuation, or long during a bullish
reversal or continuation – whether you do so depends on the pattern
and the market analysis that you have carried out.

Learn more about CFDs

The most important thing to remember when using chart patterns as

part of your technical analysis, is that they are not a guarantee that a
market will move in that predicted direction – they are merely an
indication of what might happen to an asset’s price.
 1. Head and 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.

2. 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.

3. 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.
 4. 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.
 5. 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.

6. 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.
 7. 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.

8. 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.
 9. 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.
 Chart patterns summed up
All of the patterns explained in this article are useful technical
indicators which can help you to understand how or why an asset’s
price moved in a certain way – and which way it might move in the
future. This is because chart patterns are capable of highlighting areas
of support and resistance, which can help a trader decide whether
they should open a long or short position; or whether they should
close out their open positions in the event of a possible trend reversal.