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by Jonathan AnthonyHow to Spot 10 Common Stock Chart Patterns
Stock chart patterns are an essential tool for technical analysis and successful trading. Identifying a simple curve or triangle can be big bucks in terms of risk mitigation and may even help you predict the future.
Learning the correct visual cues can help determine the right time to buy or sell a stock and build confidence in your decisions.
We will dive into various stock chart patterns and show you how they are useful in analyzing market trends.
What is a Stock Chart Pattern?
Stock chart patterns are visually repeated structures in the lines and candlesticks of a stock’s price history graphs.
The price changes of a company’s stock get tracked on stock charts. When you compare one chart to the next, various recognizable patterns emerge in how a chart behaves, giving traders an insight into future movement.
Technical analysts frequently use an array of patterns to predict an asset’s trends. They look at the factors that cause a chart to look a certain way and examine its effect on the price afterward.
Types of Stock Chart Patterns
Most stock chart patterns can be grouped into one of two types: continuation or reversal. A few have bilateral characteristics that put them under both categories and indicate a price could move in either direction.
The shapes the data points form on a graph have names that correlate to their structure. Let’s examine the most popular patterns used by traders during technical analysis.
Continuation Patterns
A continuation pattern indicates an asset will eventually continue in the same trend once it’s complete. Let’s take a look at some of the more common continuation patterns.
Flag
Flag patterns tend to happen quickly. The trend will track upwards in a bullish market, forming the flagpole.
At the breakout point, the price will continue its direction upward. The price will then consolidate and slightly reverse, making the flag both a continuation and reversal pattern. In a bearish market, the inverse happens.
Pennant
When two trendlines converge into a point, they create a pennant. This pattern starts with a drastic movement in an asset which forms a flagpole.
Traders typically hesitate during this period, causing the price to consolidate before it continues in the same direction the trend started.
Wedge
A wedge is two trendlines moving in the same direction that can rise or fall. They start wider and narrow with tighter price action. It typically signifies a price reversal, making it a continuation and reversal pattern.
A falling wedge is bullish and means a plummeting price is starting to slow its descent. A rising wedge is generally bearish and is evidence that an upward trend will start falling.
Triangle
It consists of a horizontal upper line connecting the swing highs and an upward-moving trendline connecting the swing lows, forming a triangle. It is “ascending” in bullish times, and in bearish markets, it is “descending.”
Where the two lines meet is the point at which the price will break out in the same direction it headed before the triangle formed.
Reversal Patterns
A reversal pattern signifies that the price of an asset will behave in the opposite manner to which it started once the pattern is complete. For instance, a trend that starts out bearish would end up bullish. Let’s take a closer look at some popular reversal patterns.
Double Top
This pattern happens when an asset rises and falls slightly to create two similarly sized peaks and then plummets again, forming the letter “M.”
It’s a bearish trend since the outcome significantly drops below the two previous peaks.
Double Bottom
Two plunges in price characterize the double bottom and look like a “W” on the chart. It’s when a security drops and bounces twice off a bottom before climbing.
The final upward movement indicates the ultimate reversal in a bullish trend.
Head and Shoulders
The head and shoulders pattern is a prominent peak sandwiched between two smaller peaks of similar size. It typically signifies a reversal in price.
It occurs when an asset rises to its first peak, falls, and then rises again above the first peak. On the way back down, it bounces at the same spot it did before the big peak.
Rounding Bottom
A rounding bottom follows a line of low points as the prices rise and fall, forming a bowl shape. Since it’s a curve that dips in the middle and eventually climbs on the way out, it indicates a bullish trend.
It’s a much slower-moving pattern that can take several months or even years to develop.
Triple Top Reversal
This reversal pattern has three peaks that reach the same height on the resistance line. It happens when the price of an asset climbs and then swings up and down three times but never breaks through the upper swing points.
It can signify that a security might be about to experience a price drop, and a swing below the support line after the third peak reverses the trend.
Triple Bottom Reversal
This pattern signifies the turn of a bearish trend into a bullish one. When a price drops and spikes back up twice, it creates three upside-down peaks that form a triple-bottom reversal, the opposite of a triple top.
The peaks are all close in size, and the breakthrough completes the last one as it climbs above the support line. This upward movement leads to a trend reversal.
Add Stock Chart Pattern Identification to Your Arsenal
Clearly, stock chart patterns are a great way to gain insight into an asset’s journey and gauge how it might react the next time you see something similar afoot. They can help you predict whether a trend will continue on a similar course or flip from a bear to a bull.
Pattern identification is a valuable addition to any trading strategy. You’ll use this knowledge every time you look at another stock chart. So bookmark this page, read our ebook, or make some flashcards and turn up your investing game today.
If you already have a portfolio and want to see patterns in your holdings, download the Stock Market Eye free trial. You can import your graphs and see exactly when your assets continued or reversed out of trends. There might even be a trend happening right now!
Common Stock Chart Pattern Questions
Below are a few of the most frequently asked questions regarding stock chart patterns and how they work.
How many types of stock chart patterns exist?
There are hundreds of stock chart patterns, but not all get names. Each trader has their favorite few that never seem to fail them, and some analysts use dozens. It just depends on the personal style of the trader.
How many types of stock chart patterns exist?
There are hundreds of stock chart patterns, but not all get names. Each trader has their favorite few that never seem to fail them, and some analysts use dozens. It just depends on the personal style of the trader.
Do stock chart patterns work?
Stock chart patterns do work, but they are just one tool that many successful traders employ. Although they can provide pertinent information, they shouldn’t be your only resource.
