Want to be a successful investor? You should have a good knowledge in stock chart patterns. In this post, you will find 24 patterns that you can use in your technical analysis
If you are new to technical analysis, here is a simple explanation. The technical analysis predicts future price movements based on past data. Here comes the catch. No one can predict future with hundred percent accuracy. Technical analysis is a broad topic with so many different types of calculations and analysis. A sound knowledge is necessary to predict price movements with reasonable accuracy.
Below is a table of contents for all the topics in this post. First few topics carry basic knowledge regarding charts. Then you will find explanations for 24 important stock chart patterns. You will learn hto identify and interpret each of the patterns.
Table of Contents
- Introduction: What Are Stock Chart Patterns
- Primary Use Of Chart Patterns
- 1. Head and Shoulders Top
- 2. Head and Shoulders Bottom
- 3. Cup and Handle Pattern
- 4. Double Top (M-Shaped) Pattern
- 5. Double Bottom (W-Shaped) Pattern
- 6. Symmetrical Triangles
- 7. Ascending Triangles
- 8. Descending Triangles
- 9. Rising Wedge
- 10. Falling Wedge
- 11. Bullish Flag
- 12. Bearish Flag
- 13. Bullish Pennant
- 14. Bearish Pennant
- 15. Rounding Bottom
- 16. Rounding Top
- 17. Triple Top
- 18. Triple Bottom
- 19. Breakaway Gap
- 20. Common Gap
- 21. Exhaustion Gap Top
- 22. Exhaustion Gap Bottom
- 23. Runaway Gap In Uptrend
- 24. Runaway Gap In Downtrend
Introduction: What Are Stock Chart Patterns
Chart patterns are shapes assumed by price charts. Many researchers have found success in predicting future stock prices based on past. If you predict future with reasonable accuracy, you can make decisions on whether to hold a stock or sell it.
In short, the principle behind chart analysis is this: History Repeats Itself!
Luckily, you do not have to do the research. Many data scientists have already done the tough part for you. They have come up with at least 24 chart patterns and interpretations. It is good if you learn all of these. You will see great results if you remember each and every pattern. Whenever you look at any chart, your mind will automatically visualize a pattern. Thus you will be in a better position to decide on buying, selling or holding your stocks.
Primary Use Of Chart Patterns
All stock chart patterns try to answer one question – whether a trend will continue or reverse.
(If you do not know what is a trend, here is your answer. A trend is the direction of price movement. If the price moves higher with time, you can call it a rising trend. And if the price drops with time, you can call it a falling trend. There will also be instances when the trend will be more or less straight.)
Let us begin to discuss the patterns, one-by-one.
1 Head and Shoulders Top
If you see below three aspects in a chart, you can call it a “head and shoulders – top” pattern.
- You will see a central peak and two smaller peaks on either side.
- You will find two lows between the three peaks.
- You can draw an imaginary line (neckline) passing through the troughs.
- After the third peak, the prices will break the neckline and fall further down.
A “head and shoulders top” pattern denotes a trend reversal. (A price fall is likely).
2 Head and Shoulders Bottom
This pattern is a mirror image of the previous “TOP” pattern. You will find the below aspects.
- A low with two higher-lows on either side.
- Two peaks between the three lows.
- A neckline through the peaks.
- After the third low, the prices will break the neckline and begin to rise.
Since this pattern is a mirror image of the “head and shoulders top”, you should know how to interpret. Well, you guessed right. The prices are going to rise!
3 Cup and Handle Pattern
Cup and handle pattern was first known to people through one of William O’Neil’s books. Do you know who is William O’Neil? Well, he is none other than the founder of Investor’s Business Daily. He is known for his extensive research on stock chart patterns.
You can easily remember and identify a Cup and handle pattern. If you spot a price chart looking like a cup with a short handle to the right, you have spotted the pattern!
You will find below aspects in this pattern.
- A shallow cup – Prices will fall from a peak and rise again to the same level. The fall and rise will be smooth in a semi-circular path.
- A short handle – The cup will be followed by a short handle.
- At end of the handle, the price will break the previous high.
A cup and handle pattern denotes an upcoming bullish trend.
4 Double Top (M-Shaped) Pattern
If you see a chart that resembles M, the pattern is a Double Top. The characteristics of this pattern are:
- There will be three lows in a line. (neckline)
- There will be two peaks in-between the lows.
- The price will break the neckline after the third low.
M pattern denotes that the prices are going to fall further. (Maybe a time to exit, You decide!)
5 Double Bottom (W-Shaped) Pattern
If you see a W shaped chart, the pattern is a Double Bottom. This pattern is a is a mirror image of M pattern. This pattern denotes the prices are going to rise. Three aspects of this pattern are:
- There will be three peaks in a neckline.
- There will be two lows in between.
- The price will break the neckline and move upwards.
W pattern indicates a likely bullish trend – A reason to buy or at least hold a stock.
6 Symmetrical Triangles
To understand symmetrical triangles pattern, you should know what is a trend line.
A trend line is one that connects all the peaks or all the lows. The line connecting all the peaks is called a resistance line. Similarly, a line connecting all the lows is called a support line.
A trendline can move in all three possible directions:
Now let us discuss symmetrical triangle pattern.
A symmetrical triangle is a rare phenomenon. Both the trendlines – support, and resistance lines will move towards each other forming
a symmetrical triangle as shown in the below image.
Support line will be a mirror image of the resistance line. At the end of this pattern, if the price breaks resistance a breakout is likely. But if the price breaks the support line, a breakdown is likely.
7 Ascending Triangles
An ascending triangle is a variation of the symmetrical triangle. In an ascending triangle, you will see following aspects:
- The support line will move upwards.
- The resistance line will be a fairly straight line.
Below is a simple diagram for you to understand easily.
At the end of an ascending triangle, a breakout is likely.
8 Descending Triangles
A descending triangle is a mirror reflection of the ascending triangle. Now, the resistance will move downward while the support line will be straight.
Below is a simple diagram to help you understand easily.
At the end of a descending triangle, a breakdown is likely.
9 Rising Wedge
A wedge in many ways looks like an ascending triangle. In an ascending triangle, the resistance will be straight. But in a wedge, the resistance too will slope upward. Also, you will find that the interpretation is different. But first…
A stock chart pattern can be identified as a rising wedge, if you spot the following characteristics.
- The resistance line moves upwards.
- The support line also moves upwards. And the support line slopes more than the resistance line. In other words, support line tries to catch up with the resistance line.
A rising wedge is seen as an indication of a breakdown in prices. Hence, there will be a reversal of trend downwards.
Just remember this – A rising wedge means falling prices.
10 Falling Wedge
A falling wedge pattern is in direct contrast with a rising wedge.
The characteristics are as follows:
- The support line moves downwards.
- The resistance line moves downwards as well. The resistance line will slope more compared to the support line (in the downward direction).
After a falling wedge, bullish days will follow. There will be a trend reversal in the positive direction.
Remember this: A falling wedge means rising prices.
11 Bullish Flag
Flags are stock chart patterns that exist only for short durations (few weeks). You can say a pattern is a bullish flag if you see the following characteristics:
- A sharp price rise in less duration.
- Following the sharp rise, the price oscillates between two downward sloping trend lines. The lines will be more or less parallel.
- At the end of the pattern, the price breaks the resistance and moves upward.
After the end of a bullish flag, the trend will move in the positive direction.
12 Bearish Flag
A bearish flag pattern is a variant of a bullish flag. You will see the following characteristics in this pattern.
- A sharp price drop in less duration.
- Following the sharp drop, the price oscillates between two upward sloping and parallel trend lines.
- At the end of the trend, the price breaks the support and moves in the downward direction.
After the end of a bearish flag, a bearish trend is likely.
13 Bullish Pennant
A pennant is very similar to the triangle patterns. The only difference is this. A pennant exists relatively for very short durations compared to the triangles.
While using technical stock chart patterns for your analysis, you have to keep an eye on the time duration of the patterns. Similar looking patterns may have different meanings depending upon the duration. For example, a triangle and a pennant look similar. However a triangle exists for a few months while a pennant exists only for few weeks (a super short-term pattern).
The characteristics are as follows:
- A sharp price rise in short duration.
- After the price rise, a brief pennant is formed by the trend lines as shown in the diagram.
- At the end of the pennant pattern, the price begins to rise.
14 Bearish Pennant
Bearish Pennant is similar to bullish pennant with only one difference.
You already know that a bullish pennant is preceded by a sharp price rise. But a bearish pattern becomes visible after a sharp price drop.
A bearish pennant is a continuation pattern. A sharp price drop is likely after this pattern.
15 Rounding Bottom
Rounding bottom is the simplest of the stock chart patterns to understand and interpret. The price will see a gradual drop followed by a rise in the shape of a semicircle.
This pattern is a reversal pattern. The price begins to rise after this pattern.
16 Rounding Top
Rounding top is an inverted version of rounding top. The pattern will look like as shown below.
At the end of a rounding top, price fall (bearish trend) is likely.
17 Triple Top
A triple top pattern is similar to head and shoulders pattern. The only difference is that all the peaks will be at same level.
You will see the following aspects in a triple top pattern.
- Three peaks at almost same levels.
- Two lows in-between the three peaks.
- After the third peak, prices drop and break down the support level.
A triple top is a reversal pattern when the prices begin to fall after consecutive peaks.
18 Triple Bottom
Triple bottom is an inverted triple top pattern.
The characteristics are:
- Three lows at almost same levels.
- Two peaks in between.
- After the third low, the prices move upward and break the resistance line.
After a triple bottom, a bullish trend is likely.
19 Breakaway Gap
A gap is nothing but a short pause in price charts. There are two conditions for a gap to occur.
A gap is slightly different from all other stock chart patterns. In every other pattern, you will see a continuing trade. However the gaps are created due to pause in activity (buying/selling).
- Condition 1:
- Assume the closing price of a day is higher than the opening price. If the opening price of the next day is higher than the closing price of the previous day, a gap occurs.
The above chart is of candlestick type. You will find this diagram slightly different from the other diagrams on this page. Learn more above Candlesticks here.
- Condition 2:
- Assume a stock closes lower on a day. If the opening price of the next day is lower than the closing price of the previous day there will be a gap.
There are four types of gap patterns. The first one is a breakaway gap.
Usually, a breakaway gap happens after a triangle or flag pattern. Assume a converging triangle. Towards the end of the triangle let the demand surge and prices rise sufficiently high – high enough to create a gap. Also, assume such a gap be accompanied by a strong volume. Then a strong bullish trend is likely.
20 Common Gap
A common gap is a short pause in an ongoing trend. In such a case, a gap may represent a lack of trade for a short span. After the gap, the price will most fill the gap and trend will continue as before. You can think of it as a continuation pattern.
21 Exhaustion Gap Top
You will see an exhaustion gap if the market is exhausted towards the end of a trend.
An exhaustion gap at the top of a trend will have the following qualities:
- There will be a sharp rise in price.
- After the sharp rise, a gap occurs.
- After the gap, the prices will begin to fall.
22 Exhaustion Gap Bottom
You can identify a pattern to contain an exhaustion gap at the bottom if you spot the following aspects.
- There will be a sharp drop in price.
- Towards the end, a gap occurs and prices begin to rise.
23 Runaway Gap In Uptrend
Runaway gap is a continuation pattern. If a short pause in activity happens in a strong uptrend, a gap will be created. This gap is temporary. After this gap, the trend will continue and will not be filled. (Remember: A common gap will be filled while a runway gap will not be.)
24 Runaway Gap In Downtrend
A runaway gap may also happen in a strong downtrend. Below is a simple diagram to help you understand this pattern.
Conclusion: Be Careful While Using Stock Chart Patterns
In technical analysis, stock chart patterns are great indicators of future price movements. However, the accuracy of patterns depend upon several factors including duration of the pattern, volume of activity etc. Hence, before making any decision based on chart patterns alone, have a look at company’s financials – including balance sheet, recent returns, analysts estimates, etc.
Looking at different factors along with charts will help you make informed decisions. All the very best.
Kindly leave your feedback at the comments section at the bottom.