We have seen that before investing in any stock, a trader must undergo fundamental and technical analysis to ensure profitability and avoid any risks in the future.
While conducting the technical analysis, interpreting the charts is very important. As these stock chart patterns play a crucial role. When you learn how to interpret the charts accurately, you will be able to profit from the breakouts and reversals in the price trends.
Understanding the stock chart patterns can prove the best weapon for any trader to survive in the cut-throat competition along with making money.
You will find patterns everywhere around. It's Trader Psychology, and every human's too to find and follow a strict pattern. A deep understanding of the patterns is the main pillar of success in technical analysis.
Let us see in detail why these stock chart patterns are so important to study; then, we shall move with the 13 stock patterns you must know to take advantage of the breakouts and reversal and profit from them.
Importance of stock chart pattern:
Stock chart patterns help traders view a series of price fluctuations during a given time frame. The time frame can be for the day, week, month, etc. The best thing about any pattern is they keep repeating itself, and Trader Psychology gets attracted towards this kind of repetition.
The earlier you learn, the earlier you will be able to enjoy the benefits and get the added advantage in the stock market. In technical analysis, the indicators such as support and resistance levels, volume, Fibonacci Retracement, etc. help, in the same way, stock chart patterns help identify the reversal and continuation in the trends.
We will share some of the best stock chart patterns to help you in trading. It would be nice if you could print this and keep checking every time you trade. By visualizing the patterns, you will be able to understand them quickly, recognize the type of pattern, and take swift action.
When there is a hue movement after a period of pause, a pennant is created due to converging lines. After this breakout, a huge price move is seen in the same direction. It can last from a minimum of 1 week to 3 weeks. Its shape is the same as the flag. During the first move, the volume will be very high; at the pennant portion, it will weaken a little bit and increase after the breakout.
Cup with Handle Pattern:
This stock chart pattern has its name from the design or pattern it generates on the chart. The U-shaped in the beginning is defined as the cup here, and the right-hand side slope is the handle here. Generally, the right side -the slope side of the chart has a low volume and can stay from 7 weeks to 65 weeks.
Triple bottom stock chart pattern:
Traders generally use this pattern in technical analysis for predicting the downward trend. The Triple bottom is generated when the stock price falls 3 times at the same price level before breakouts or allowing the trend to reverse.
This triangle is generally visible in the upward trend and is known for its continuation. It is a bullish pattern, it can also be found at the end of a downward trend, but here also, it represents the continuation. They are always bullish wherever they occur.
These descending triangles are also one of the continuation patterns. They are created while the price is moving downward. It might seem like a reversal during the upward price shift, but still, it represents the continuation.
Bullish symmetrical triangles:
Two trendlines coverage, making a distinct shape and making it easier for the traders to spot. This chart pattern is generated by stretching the trend lines that connect the peaks and troughs. The price trendline creates a barrier, and after breaking the barrier, the price moves sharply in the upward direction.
This pattern is also called a saucer bottom pattern among some groups of investors. It represents the long-term reversal from a downward trend to an upward trend. It is similar to a cup and handle but without a handle. This type of pattern can stay from months to years.
The flag is created from a rectangular shape; the two lines of the rectangle represent the two trend lines. One is support, and the other one is resistance. When the price breaks out, the flag is generated. The flag will have a slope in the trendline and must be moving in the opposite direction of the original price movement. As soon as the price breaks any trend line, either support or resistance, it generates the buy and sell signal for the trader.
Double Top Pattern:
The double top stock chart pattern has two peak points, and it is a bearish reversal pattern. It starts with the long uptrend and makes the shape of the letter M very easy to recognize, even for a novice trader. One more similar pattern has three peaks, known as the head and shoulder pattern. The only difference between these two patterns is that the double top has two peaks, and the head and shoulder have three.
Head and shoulder pattern:
As we saw above, it is similar to that of the double top, having three peak points the two sides' peaks or shoulders can be at identical price levels, and the centre peak is a little high representing the head.
Inverse head and shoulder Pattern:
The inverse head and shoulder pattern is also known as head and shoulder bottom or a reverse head and shoulder; all the names mean the same. The name is derived from the pattern it makes - one long peak in the centre showing the head and two small peaks on either side showing the shoulders.
Bearish Symmetrical Triangle:
similar to the Bullish symmetrical Triangle, the bearish symmetrical triangle also creates a unique shape with the convergence of two trendlines. You will find the trendlines passing through a series of peaks and troughs. The trendlines create a barrier at some price level, and a sharp price movement is noticed in the downward direction when the price breaks through that barrier.
This is a continuation or reversal pattern, depending on the falling wedge directions. They are quite similar to triangles but are sloppy from the previous trend. The Falling Wedge is created by the series of lower highs and lower lows instead of making triangles.
So, the above listed are the basic patterns to take advantage of the outbreaks and reversal in the trendline. Keep the grahs printed on your trading desk to get a quick review and decide on your next trading move. Keep observing the patterns when you are not trading to get more practice. I hope you understood all the stock chart patterns mentioned on this page. kindly inform us via the comment section below if you have any questions.