The rise and fall of an asset’s price can create distinct formations on price charts, called chart patterns. Learning to identify these chart patterns can aid in predicting price trends, and backing up your trading decisions.
This article at a glance:
- Chart patterns can indicate continuation, reversal or bilateral trends.
- There are multiple types of chart patterns, all of which can aid in making trading decisions.
- Having a cheat sheet on hand can be helpful in identifying chart patterns.
How to identify price trends in chart patterns
Before you analyse price data and what it could mean, you first need to know how to find chart patterns. Here are three things to consider when reading chart patterns:
Continuation patterns are a sign that a trend is likely to continue. These often form in the middle of a trend. Once the pattern is complete, the trend will resume as before.
Reversal chart patterns
Trend reversal patterns suggest that the prevailing price movements are about to change direction. If the trend line is bullish and a reversal pattern forms, it suggests the price will become bearish and vice versa.
Bilateral chart patterns
When the price of an asset can move in either direction, it’s known as a bilateral pattern. It’s hard to spot bilateral chart patterns because there isn’t a strong movement in either direction - neither the bulls nor the bears have control of the market.
Types of chart patterns
When price data forms a familiar pattern, it can help analysts identify trends and predict possible future movements. This, in a general sense, is the aim of technical analysis – if you know the direction an asset’s price will move, you can make the right buy/sell decisions.
Traditional chart patterns
Traditional chart patterns are common formations that can appear in all markets. You can use this type of chart trading for stocks, forex, and other financial instruments.
There are 10 classic trading chart patterns you can look for:
- Triple Bottoms
- Double Bottoms
- Rounded Bottoms
- Head & Shoulders
- Flags & Pennants
- Upside Breakouts
One of the most common patterns traders look for are candlestick patterns. They use price data and trading volume to identify trends and breakout/reversal points.
A basic candlestick chart pattern is usually a formation of candlesticks that show opening/closing prices, high/low prices, trading volume, and the price direction.
Candlestick patterns are commonly used in forex and allow traders to carry out technical analysis. They can identify bullish or bearish trends. They can also form continuation patterns. Some of the most common chart patterns in trading are:
Bullish Japanese candlestick patterns
- Inverse Hammer
- Piercing Line
- Morning Star
Bearish Japanese candlestick patterns
- Hanging Man
- Shooting Star
- Evening Star
- Three Black Crows
Continuation chart patterns
- Spinning Top
- Falling Three Methods
- Rising Three Methods
Use chart patterns to find trends
Chart patterns are not accurate 100% of the time, but are still a useful way to identify potential trends. By using patterns with other indicators, you can determine whether trends are forming, continuing, or changing.
This knowledge will provide you with a better idea of when to enter or exit positions, and making the right moves at the right times.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.