Best stock chart patterns and trading graphs

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Desmond Leong

What are stock chart patterns?

Stock chart patterns are visual representations of the price fluctuations of a stock over time. Traders use stock chart patterns to identify potential trend continuations or reversals, as well as support and resistance levels. These patterns can range from simple trend lines to more complex symmetrical triangles and shoulder patterns.

Analysing price patterns and trend lines in conjunction with other technical indicators can provide important insights into the stock's future price movements. Traders can get a competitive advantage and make more informed investment decisions based on previous price patterns by learning to detect these chart patterns and trends.

 

Types of stock trading chart patterns

There are a number of patterns with distinctive traits that traders should learn and recognise.

Continuation patterns, such as pennant patterns and flag patterns, suggest that the price will likely continue in the same direction after a period of consolidation. Trend lines are drawn to identify the direction of the overall trend.

Reversal patterns like inverse head and shoulders signal a potential change in trend direction.

Resistance levels indicate a price level at which the stock has historically had difficulty moving above.

Common chart patterns such as symmetrical triangles, wedge patterns, and shoulder patterns depict periods of consolidation before the price continues in the previous trend.

 

Stock chart patterns list

 

Continuation patterns

Continuation patterns in stock chart analysis refer to price patterns that indicate a temporary pause or consolidation in a prevailing trend before the trend continues. These patterns can help traders identify potential buying or selling opportunities.

Types of continuation patterns include:

  1. Bullish and Bearish Flags: These patterns indicate that the existing trend will continue after a brief consolidation period. The pattern gets its name because it looks like a flag on the chart, with the flagpole representing the primary trend and the flag representing the consolidation.
  2. Pennants: Similar to flags, pennants represent a pause in an existing trend and are typically followed by a continuation of the previous trend. The pennant pattern looks like a small symmetrical triangle on the chart.
  3. Rectangles: A rectangle pattern happens when the price moves sideways between a horizontal support and resistance level for a certain period before eventually continuing in the direction of the prior trend.
  4. Cup and Handle: The cup and handle is a bullish continuation pattern that begins with a cup-shaped pattern followed by a smaller consolidation period that forms the 'handle', after which the price typically breaks out to the upside.
  5. Ascending and Descending Triangles: These patterns are formed when the price makes higher lows in an ascending triangle or lower highs in a descending triangle, indicating a potential continuation of the trend once the price breaks through the horizontal line.
  6. Wedges: Rising wedges during an uptrend (bearish) and falling wedges during a downtrend (bullish) can sometimes act as continuation patterns rather than reversal patterns, but it depends on the broader market context.

Traders often use these continuation patterns to anticipate future price movements, confirm trend direction, and potentially capitalise on the resumption of a bullish or bearish trend.

 

Reversal patterns

Reversal patterns in stock chart trading refer to certain graphical formations that signal a potential change in the direction of a stock's price trend. There are several types of reversal patterns, each with its own distinctive shape and characteristics.

  1. Head and Shoulders: This is a bearish reversal pattern that begins with a peak (left shoulder), followed by a higher peak (head), and then a lower peak (right shoulder), suggesting a reversal from an uptrend to a downtrend once the pattern is complete.
  2. Inverse Head and Shoulders: This is a bullish reversal pattern that is the inverse of the head and shoulders pattern. It starts with a trough (left shoulder), followed by a deeper trough (head), and then a higher trough (right shoulder), signalling a possible shift from a downtrend to an uptrend.
  3. Double Top and Double Bottom: A double top, which is a bearish reversal pattern, forms after an extended move upward and appears as two consecutive peaks at roughly the same price level. A double bottom, a bullish reversal pattern, forms after a sustained downward movement and appears as two consecutive troughs at approximately the same price level.
  4. Triple Top and Triple Bottom: These are similar to the double top and double bottom patterns but with an extra peak or trough. They are stronger indicators of potential reversals because they show that the price has tested the resistance or support level three times and failed to break through.

 

Support and resistance

Support and resistance are crucial concepts in technical analysis used to determine the price levels at which a given security tends to stop and reverse. These levels are used to identify potential buying and selling opportunities.

Support: Support is the level where the price tends to find a 'floor' in its downward movement, stopping it from falling further and potentially bouncing back up. It's created by buyers entering the market whenever the security dips to a lower price. If a price falls to a support level and then bounces back up, that support level is reinforced.

Resistance: Resistance is the level where the price usually stops rising and dips back down. It's created by sellers entering the market whenever the price reaches higher levels. If a price rises to a resistance level and then falls, that resistance level is validated.

Support and resistance levels can vary in strength. A price level is considered a strong level of support or resistance if it has been touched and reversed multiple times. Once these levels are broken, they often become the inverse—for example, if the price drops below a support level, it can become a new resistance level. Similarly, if the price rises above a resistance level, it can become a new support level.

These levels can be identified by looking at historical price data and finding areas where the price has made significant reversals. They are typically used in conjunction with other technical analysis tools to make trading decisions. They can help traders understand potential areas of supply and demand, as well as potential profit targets or stop-loss points.

 

Head and shoulders

Head and shoulders is a popular chart pattern used in technical analysis to predict trend reversals. It is characterised by three peaks, with the centre peak (the head) being higher than the other two (the shoulders). The pattern is formed when an upward trend reaches its peak and is followed by a downward movement, creating the left shoulder. The subsequent upward movement forms the head, which is also followed by a downward movement that creates the right shoulder. Traders typically use this pattern to identify a potential reversal from a bullish trend into a bearish trend. Once the pattern is confirmed, traders may sell their positions or open short positions, anticipating a further downward movement in the stock price. The neckline, which connects the lows of the shoulders, acts as a support level. If the stock price breaks below the neckline, it signals a confirmed reversal and a potential downtrend.

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Cup and handle

The cup and handle stock chart pattern is a bullish continuation pattern that is often seen in technical analysis. It gets its name from its appearance, which resembles a cup with a handle on the right side. The pattern typically occurs after a significant upward trend in stock price and is characterised by a rounded bottom followed by a smaller consolidation period, forming the handle. Traders and investors look for this pattern as it suggests that the stock price may continue its upward movement after the consolidation period. The cup and handle pattern is considered bullish because it indicates that the price has found support and is likely to resume its upward trend. Traders often use this pattern to identify buying opportunities, setting their entry point near the resistance level formed by the handle.

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Double top

Double-top stock chart patterns are a common reversal pattern used in technical analysis. They occur when the price of a stock reaches a certain level, experiences a downward movement, rallies back up to approximately the same level as the first peak, and then falls again. These patterns are characterised by two consecutive peaks with a trough or valley in between. Double tops are often seen as a signal that the bullish trend is reversing, and traders may use this pattern to make selling decisions. Once the price breaks below the trough level, it is seen as confirmation of the reversal and may lead to further downward movement. It is important for traders to pay attention to the volume during this pattern, as a decrease in volume during the second peak can indicate a lack of buying pressure and further reinforce the bearish outlook.

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Triple top

A triple-top stock chart pattern is a technical analysis pattern that indicates the possibility of a bullish trend reversal in the price of a stock. This pattern consists of three consecutive peaks of roughly equal height, with two troughs in between. The peaks form resistance levels that the stock fails to break above, suggesting that buying pressure is waning. Traders and investors often use the triple top pattern to identify potential trend reversals and consider it a bearish signal. They may place sell orders or short the stock once the price breaks below the support level formed by the troughs. The target for the downward movement is often estimated by measuring the vertical distance between the peaks and extending it downward from the breakout point.

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Rounding top

Rounding-top stock chart patterns, also known as saucer patterns, are characterised by a gradual upward slope followed by a slower decline. This pattern is indicative of a reversal in the stock's upward trend and a potential shift towards a downward trend. The rounding top pattern is formed when the stock price reaches a peak and begins to level off, resembling a rounded shape. Traders use this pattern to identify potential trend reversals. When a rounding top pattern is recognised, it is often seen as a signal to sell or short the stock, as it suggests that the stock's price may soon experience a downward movement.

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Double bottom

Double-bottom stock chart patterns are trend reversal patterns that occur after a significant downward movement in a stock's price. These patterns are characterised by two distinct lows with a peak in between, forming a "W" shape on the stock chart. The first low represents a sell-off in the stock, followed by a temporary recovery and a subsequent decline to the second low. The second low shouldn't breach the first low significantly. Traders and investors often look for double bottom patterns as a signal of a potential trend reversal and use this information to make their investment decisions. The pattern is considered confirmed when the stock price breaks above the high point between the two lows, indicating a shift in market sentiment from bearish to bullish.

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Triple bottom

Triple-bottom stock chart patterns are a type of technical analysis pattern that typically indicates a trend reversal from a downward movement to an upward movement in the stock price. This pattern is characterised by three distinct lows in the price chart, creating a "W" or triple bottom shape. The first two lows are relatively close in price, followed by a slightly lower third low. The price then breaks above the resistance level formed by the peaks between the lows, confirming the trend reversal. Traders often use triple bottom patterns to identify buying opportunities, as they suggest that the stock price has reached a support level and is likely to start an upward trend.

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Rounding bottom

A rounding bottom stock chart pattern, also known as a saucer bottom, is a bullish reversal pattern that indicates a potential trend reversal from a downtrend to an uptrend. This pattern is characterised by a gradual and smooth curve, resembling the shape of a bowl or saucer, which forms at the bottom of a price chart. The pattern typically forms over an extended period of time and signifies a period of consolidation and accumulation. As the rounding bottom pattern develops, it suggests that selling pressure is diminishing and buying interest is starting to increase. Traders and investors often use the rounding bottom pattern to identify potential reversal opportunities and time their entry into a stock or asset. Once the price breaks out of the rounding bottom pattern, it may signal the start of a new bullish trend, providing an opportunity to capitalise on potential price movements to the upside.

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Flag

Flag stock chart patterns are a common continuation pattern that occurs during an upward or downward trend. The pattern is characterised by a period of consolidation in which the price movement forms a rectangular shape, resembling a flag. The flag pattern is typically preceded by a sharp movement in price, known as the flagpole, followed by a period of sideways price action within parallel trend lines. This pattern signifies a temporary pause or consolidation in the trend before the price resumes its previous direction. Traders often use the flag pattern as a bullish or bearish signal, depending on the direction of the preceding trend. A breakout above or below the flag pattern's boundaries is seen as an indication of a continuation of the previous trend, allowing traders to enter or exit positions accordingly. The length and duration of the flag pattern can vary, and it is important to consider volume and other technical indicators to confirm the validity of the pattern before making any trading decisions.

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Wedge

A wedge pattern is a common chart pattern used in technical analysis to predict future price movements of a stock. It is formed when the price of a stock creates a narrowing range with higher highs and lower lows, resembling a wedge shape on the chart. Wedges are characterised by their converging trend lines, with one trend line connecting the higher highs and the other connecting the lower lows. This pattern can occur in both uptrends and downtrends. Traders use wedge patterns to anticipate a potential breakout or breakdown in price. A breakout occurs when the stock's price breaks above the upper trend line of the wedge, indicating a potential upward movement, while a breakdown happens when the price breaks below the lower trend line, suggesting a potential downward movement. Wedges can serve as a signal for trend reversals or as a continuation pattern, depending on the direction of the previous trend.

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Ascending triangle

An ascending triangle is a bullish stock chart pattern that often signals an upward trend in price movement. It is formed by a horizontal resistance line and a rising trendline that converge to create a triangle shape. The horizontal line acts as a resistance level, which means that the stock price has struggled to break above that level in the past. On the other hand, the rising trendline reflects higher lows being established over time. When the stock price breaks above the horizontal resistance line, it is seen as a bullish signal, indicating that buyers have gained control and the stock is likely to continue its upward trend. Traders and investors often use the ascending triangle pattern to identify potential buying opportunities, as it suggests that the stock has the potential to make significant gains.

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Descending triangle

Descending triangle stock chart patterns are a type of bearish continuation pattern that can indicate a downward trend in a stock's price. These patterns are formed when the stock's price creates a series of lower highs with a consistent support level along the bottom. This creates a triangle shape that trends downwards, with the upper trendline acting as a resistance level. Traders often interpret this pattern as a sign of weakness in the stock price, suggesting that sellers are gaining control. The descending triangle pattern is often used by traders as a signal to enter short positions or sell off existing holdings, as they anticipate further downward movement in the stock's price.

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Symmetrical triangle

The symmetrical triangle is a common chart pattern that displays a period of consolidation in the stock market. It is formed by two trendlines converging at a point, creating a triangle shape. The upper trendline connects a series of lower highs, while the lower trendline connects a series of higher lows. This pattern indicates a balance between buyers and sellers, resulting in neutral market sentiment. When the price eventually breaks out of the triangle, it is seen as a signal for a potentially significant price movement in the direction of the breakout. Traders often use this pattern to anticipate and capitalise on trend reversals or trend continuations. A breakout above the upper trendline suggests a bullish scenario, while a breakout below the lower trendline indicates a bearish outlook.

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Pennant

Pennant stock chart patterns are a type of continuation pattern commonly seen in technical analysis. They are formed when there is a sharp movement in a stock's price followed by a period of consolidation. The pennant pattern is characterised by converging trend lines that form a triangle, with a flagpole representing the initial sharp movement and a small symmetrical triangle representing the consolidation period. This pattern often indicates a temporary pause in the prevailing trend before the price continues in its previous direction. Traders often look for a breakout in either direction from the pennant pattern as a signal for potential future price movements. A breakout to the upside suggests a bullish continuation, while a breakout to the downside indicates a bearish continuation.

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Gaps

Gaps are significant and easily identifiable stock chart patterns that occur when there is a sudden jump or drop in a stock's price, causing a gap on the chart. These gaps can appear due to various factors, such as earnings announcements, economic news, or market sentiment. There are three types of gaps: the common gap, the breakaway gap, and the runaway gap. A common gap occurs within a price pattern and does not provide a clear indication of the stock's future direction. The breakaway gap, on the other hand, signifies the beginning of a new trend, either bullish or bearish. Finally, the runaway gap indicates a continuation of an existing trend. Traders and investors use gap patterns to identify potential support or resistance levels as well as possible entry or exit points for their trades. By studying the characteristics and interpretation of gaps in stock price charts, traders can gain insights into market sentiment and make more informed trading decisions.

 

Price channel

Price channel stock chart patterns refer to a graphical representation of the price movement of a stock over a certain period of time. These patterns are characterised by the formation of two parallel lines, representing the upper and lower boundaries of the price channel. The upper line, known as the resistance level, represents the price at which the stock tends to face selling pressure, while the lower line, known as the support level, represents the price at which the stock tends to find buying support. Traders and investors use price channel patterns to identify potential entry and exit points for trades. By observing the price movements within the channel, they can anticipate trend continuations or reversals. Additionally, price channels can provide insights into the volatility and potential future price movements of a stock.

 

Bump and run

The bump and run stock chart pattern is a technical analysis pattern that typically occurs during an uptrend. It consists of three main phases: the lead-in, bump, and run. In the lead-in phase, the stock exhibits a gradual uptrend, forming a support line. The bump phase is characterised by a sharp increase in price, forming a peak. Finally, in the run phase, the price experiences a rapid decline, breaking below the support line established in the lead-in phase. Traders often use the bump and run pattern to identify potential trend reversals or short-selling opportunities, as the breakdown below the support line suggests a potential change in market sentiment and a shift from bullish to bearish conditions.

 

How to identify stock chart patterns

Identifying stock chart patterns is an essential skill for traders looking to make informed investing decisions. Traders can spot these patterns on price charts, which visually represent the price movements of a particular stock over a given period. These patterns, such as symmetrical triangles, wedge patterns, and head and shoulders patterns, can indicate potential trend reversals or continuations. Traders should use chart patterns when assessing the stock's current price direction and predicting future price movements.

By analysing these patterns, traders can gain valuable insights into the stock's behaviour, resistance levels, and support levels. They can also use technical indicators, trend lines, and trading volume to confirm the validity of a pattern. However, it's essential to remember that chart patterns are not foolproof indicators and should be used in conjunction with other forms of analysis. Traders should carefully analyse the stock's fundamentals, market conditions, and other technical indicators to make well-rounded investment decisions based on chart patterns.

 

How to trade stock chart patterns

Trading stock chart patterns involves identifying specific patterns on price charts and using them as signals to make trading decisions. Here are 6 useful tips on how to trade stock chart patterns:

  1. Learn and identify patterns: Familiarise yourself with common chart patterns such as triangles, double tops and bottoms, head and shoulders, and flags. Understand their characteristics, including trend direction, pattern formation, and key support and resistance levels.
  2. Confirm the pattern: Once you identify a potential pattern, confirm it by analysing other technical indicators or using additional charting tools. Look for volume confirmation, trendline breaks, or oscillators signalling overbought or oversold conditions.
  3. Determine entry and exit points: Decide where to enter a trade based on the pattern's breakout or breakdown level. Set a stop-loss order to limit potential losses and a profit target to secure profits. Consider using risk management techniques like position sizing and trailing stops.
  4. Monitor price action: Watch how the price behaves after the pattern is confirmed. If it moves in your favour, consider adjusting the stop-loss order to protect profits. If the price doesn't behave as expected, be prepared to exit the trade.
  5. Combine with other analysis: Consider combining chart patterns with other technical analysis tools like moving averages, trendlines, or Fibonacci retracements for additional confirmation.
  6. Practise and learn: It's crucial to practise trading chart patterns using historical data or on a demo account before risking real money. Keep track of your trades, analyse successes and failures, and continuously refine your trading strategy.

Remember that no trading strategy guarantees success, and it's important to manage risks, exercise discipline, and adapt to changing market conditions.

 

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The images shown are for illustration purposes only. The data is sourced from third-party providers. The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your personal objectives, financial situation, or needs into account. Readers should seek their own advice. Past performance is not indicative of future results, and any forecasts about future performance may not occur.



Desmond Leong

Desmond Leong

Desmond Leong runs an award-winning research team (2019, 2020, 2021 Finalists for Best FX Research and Best Equity Research) advising the largest banks and brokers on where the markets are heading. He specialises in technical analysis with a focus on Fibonacci, chaos theory, correlations, market structure, and Elliott Wave.

Desmond is incredibly passionate about helping people become better traders - working closely with Axi to produce educational videos, quizzes, e-books, indicators, and market research to help traders take their game to the next level. His team is also behind the Axi VIP portal, dedicated to continuing to guide and educate traders.

Find him on: LinkedIn | Instagram


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