Chart Patterns

In technical analysis of stock trading, chart patterns play a major role in making trading decisions. As all the traders keep buying and selling a particular stock, the price keep moving up and down, with increased and decreased demand andsupply. This up and down wave like movements, over a period of time form recognizable recurring designs or figurative diagrams.

Just like the patterns formed by the up and down lines in an ECG or an EEG which tells us a lot about the condition of the heart and the brain, the patterns created by the price movements tells us a lot about the status of the price of a stock. I would call it as the EEG of the combined brain of all the traders, which tells us how that combined mind is thinking.

In fact the areas of pattern formations are resting areas, during indecision times, where majority of traders are thinking, to decide whether to buy more or sell more. These oscillations of minds results in the formation of patterns in a chart.

There is a saying that amateurs create the stage for the professionals to play rocking dance. Major portion of the majority of the patterns are created by the amateurs. When the right time comes, professionals enter and take the prices further. This is expressed by the hesitancy seen in the formation of patterns and decisive movements seen after the completion of the patterns.

Although every movement forms a pattern, there are a few recognizable chart patterns which when followed gives us predictable movements in the immediate future on more number of occasions. Taking trades based on these patterns have statistically proved profitable over a period of time. This has shifted the sock trading style from buy and hold type of trading to pattern trading, which statistically gives us more opportunities to have consistent profitable trades.


These patterns may be continuation patterns or reversal patterns.

In a trending market, the stock prices loses their momentum due to profit booking. They rests for a while and make some up and down movements, before they continue their journey, in the direction of the original trend. These patterns formed during these resting periods are termed Continuation Patterns.

Or they may be Reversal Patterns. Here the trend, when exhausted, slows down, forms a pattern before they trend in the opposite direction.

So these patterns alerts us as to the direction of the market. They provide us early signal either to book profit or make a new entry.

Trading patterns demands a thorough understanding of not only the chart formations, but also the principles of bull market, bear market, market trends, trend lines, support and resistance.



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The different types of common patterns are:

Continuation Chart Patterns


  • Falling Wedge
    Falling Wedge is a continuation chart pattern, formed by price action, which is contained with in a converging and descending trend lines.
  • Rising Wedge
    Rising Wedge is a continuation pattern, formed by price action, which is contained with in a converging and ascending trend lines.
  • Flag Pattern
    Flag Patterns are continuation patterns, formed by a minor consolidation, which is contained with in a small rectangle or a parallelogram.
  • Pennant Pattern
    Falling Wedge is a continuation pattern, formed by price action, which is contained with in a converging and descending trend lines.

Reversal Chart Patterns


  • Head and Shoulder
    Head And Shoulder is one of the very common and profitable reversal patterns. It is very reliable with 90% probability.
  • Reverse Head and Shoulder
    Reverse Head and Shoulder is one of the very profitable bullish reversal chart patterns seen in a downtrend. It is very reliable with 90% success rate.
  • Double Bottom
    Double Bottom is a reversal pattern, where a stock in a down trend, hits a support level twice and reverses to continue in an up trend.
  • Double Top
    Double Top is a reversal pattern, where a stock in an up trend, hits a resistance level twice and reverses to continue in a down trend.
  • Triple Bottoms
    It is a reversal pattern.
  • Triple Top
    Triple Top is a reversal pattern, where a stock in an up trend, hits a resistance level thrice and reverses to continue in a down trend.
  • Trend line Breaks
    Trend Line Break is a reversal pattern, where a stock in an up trend, breaks out of a support trend line and a stock in a down trend, breaks out of a resistance trend line.
  • Multiple Tops
    Multiple Tops is a reversal pattern, where a stock in an up trend, hits a resistance level several times and reverses to continue in a down trend.
  • Island Formations
    Island Formation is a reversal pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
  • Abandoned Baby
    Abandoned Baby is a reversal pattern, formed by price action in a single time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
  • Broadening Bottom
    It is a reversal chart pattern.
  • Broadening Top
    It is a reversal chart pattern.
  • Cup and Handle
    It is a reversal chart pattern

Both Continuation and Reversal Chart Patterns


  • Ascending Triangle
    Ascending Triangle is a pattern, characterized by horizontal top and rising bottom. This is created when a bullish market pushes the price up against a resistance level. It can be both continuation and reversal patterns.
  • Descending Triangle
    Descending Triangle is a pattern, characterized by horizontal bottom and sloping top. This is created when a bearish market pushes price down against a support level. It can be both continuation and reversal patterns.
  • Symmetrical Triangle
    Symmetrical Triangle is a pattern, characterized by converging top and bottoms. This is created when there is indecision in the direction of the market. It can be both continuation and reversal patterns.
  • Channel Formation
    Rectangle Formation can be both continuation and reversal patterns. The stock prices tend to move between two horizontal support and resistance lines.
  • Gaps Formation
    Gaps are continuation pattern, formed by an unfilled space between two trading session. Gaps are referred as Tasuki, meaning window in candlestick charting. It can also be a reversal chart patterns.

To make a trading decision, study of patterns should be combined with the study of volume and indicators.




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