Learning about chart patterns and using them to up your trading game

Being a trader isn’t easy, and there are several things you need to take into account before buying or selling an asset. Becoming adept at technical analysis and having a good grasp on the ways in which the marketplace moves is one of the best ways to ensure your gains remain consistent and surpass your losses since, although making predictions with 100% accuracy is impossible, patterns do in fact occur over a certain period of time, and there are ways to make the most of them when they do. 

Continuation patterns 

There are several types of stock chart patterns you must be familiar with if you’re to be successful in your trading endeavors. Continuation patterns are among the most well-known, and they signal a pause during a prevailing, overarching trend since they tend to appear when an interruption occurs. Generally, this occurs when the bulls are gathering their strength after a very strong upswing movement or when the bears take some time to relax during market conditions that are favorable for them. 

When a price pattern starts forming, there is no way to know if it is going to continue or if it will start reversing instead, so you must be very careful. Keep your eyes on the trendlines used to draw the price patterns, and notice whether the price point is moving above the continuation zone or not. Most technical analysts say that a trend should be viewed as continuous until there is actual, undeniable confirmation that it has been reversed. 

Reversal patterns 

When a price pattern records changes in the prevailing trend, the movement is known as a reversal pattern. During times like these, traders lose energy, so the established trend takes a break, and a new direction starts forming as energy emerges from the other end of the spectrum. This scenario applies to both bearish and bullish tendencies. For instance, if there’s an uptrend supported by the bulls, matching pressure from the bears will move the marketplace in the other direction and give way to the bearish movement, shifting the trend to the downside. 

When reversals occur at the market top, they are called “distribution patterns”, and the trading instrument is more likely to be sold rather than bought. On the other end of the spectrum, reversals that take place at the market bottom are referred to as accumulation patterns because the asset is bought more often than sold. 

Pennants 

Pennants are some of the most well-known continuation patterns constructed via two converging trendlines. The fundamental feature of this pattern is that the trendlines move in two separate directions, one up and one down. The volume typically decreases during the formation of the pennant, and it is then followed by an increase when the price point ultimately breaks out. When a pennant is bearish, it means that there is a downward trend in the values, with volumes dropping and a flagpole taking shape on the right side. On the other hand, a bullish pennant will have the flagpole on the left side. 

Flags 

Flags are another type of continuation pattern that is built using two parallel trendlines. These lines can go up, down, and even sideways. The ones with an upward slope are generally bullish and appear as a pause in a down-trending market, while a flag that moves downward indicates that there’s an upcoming break from an uptrend marketplace. This chart pattern is more often than not correlated with declines in volume, which only recover when the price point breaks out of the flag formation. 

Ascending triangles 

The ascending triangle is also a symbol of continuation, being a trend with a highly specific entry point, stop loss, and profit target. Resistance and breakout lines are at an intersection, showcasing the entry point, making the ascending triangle a decidedly bullish pattern. Its opposite is the descending triangle, which indicates that the demand is decreasing, so a descending trend line appears. This also means that a breakdown is more likely than not to occur. 

Symmetrical triangles are yet another example, and they take place at the convergence of two lines toward each other, signaling that a breakout is in the making. It could signal the beginning of either an upward or a downward trend, but the extent and scope of the breakouts is always the same as the height of the left vertical side of the triangle. 

Head and Shoulders 

The head and shoulders pattern is a reversal figure that appears on both market tops and bottoms and as a series of three pushes. There’s a first peak, then a second one that is larger, and then a third one that is more similar in size to the first. When there’s an uptrend that is cut short by a Head and Shoulders event, a trend reversal is starting to take shape, meaning that a downtrend is soon to follow. The scenario works vice versa as well so that a downtrend can shift to the upside as part of a head and shoulders reversal. 

The trendlines here are sloped or even entirely horizontal so that the troughs between the head and shoulders can be connected. The volume can decline as the pattern grows and moves back in place after the price succeeds in breaking either above or below the trendlines. 

Gaps

The Gaps are reversal patterns which occur in the space between two separate trading periods when there’s either a significant increase or a considerable decrease in value. If a stock closes at $5.00 and then opens at $8.00 as a result of positive earnings. There’s exhaustion gaps, runaway gaps, and breakaway gaps, with the first forming at the end of a trend, the second in the middle, and the breakaways at the beginning. 

There are almost 100 chart patterns traders use in order to improve their strategies and increase their earnings. Some only use a few of them, while others make use of many more as they believe it gives them a more comprehensive view of the situation. The strongest chart patterns depend quite a lot on the methods and preferences of each individual trader, so the one that works best for you will largely depend on your trading goals.