Chart patterns are visual representations of price movements that traders use to predict future market behavior. Chart patterns have a rich history dating back to the early 20th century, with pioneers like Charles Dow laying the foundation for technical analysis. Over time, traders and analysts have identified numerous recurring chart patterns that offer insights into potential market directions.

Chart patterns fall into two main categories: continuation and reversal patterns. Continuation patterns suggest that the current trend is likely to persist after a brief pause. These patterns often represent periods of consolidation before the trend resumes. Examples include flags, pennants, and triangles. Reversal patterns, on the other hand, indicate that the current trend may be coming to an end and a new trend in the opposite direction may be beginning. Head and shoulders, double tops, and double bottoms are common reversal patterns.

Some patterns are bilateral, meaning they can signal either a continuation or reversal depending on how they resolve. These patterns, such as symmetrical triangles, require careful analysis of the breakout direction to determine their implications.

The 42 trading chart patterns encompass a wide range of formations. Reversal patterns include classics like head and shoulders, inverse head and shoulders, double top, double bottom, triple top, triple bottom, rounding top, and rounding bottom. Continuation patterns feature flags, pennants, wedges, various types of triangles, and rectangles. Candlestick patterns form another significant category, including doji, hammer, hanging man, engulfing patterns, harami, morning star, evening star, three white soldiers, and three black crows. These patterns often provide insights into short-term price movements and sentiment shifts.

Complex patterns like cup and handle, inverse cup and handle, saucer, diamond top, and diamond bottom require more time to form but can offer powerful signals. Volatility patterns such as broadening formations and island reversals can indicate periods of market indecision or potential reversals. Gap patterns, including breakaway gaps, runaway gaps, and exhaustion gaps, offer insights into strong moves and potential trend changes.

Understanding these patterns helps traders make more informed decisions about potential market movements. Read on to learn more.

1. Double Top Chart Pattern

The double top is a bearish reversal chart pattern that forms after an uptrend and signals a potential trend change from bullish to bearish. The double top is characterized by two consecutive peaks that reach approximately the same price level, separated by a moderate trough.

The pattern resembles the letter “M” and consists of several key components: an initial uptrend leading to the first peak, a pullback or consolidation period that forms a trough, a second attempt to move higher, which fails to surpass the first peak, and a breakdown below the support level (neckline) that confirms the pattern. Look at the image below.

The two peaks should form at roughly the same level, indicating strong resistance. The pattern is complete when the price drops below the support level, known as the neckline, which is formed by connecting the lowest points of the trough between the peaks. The double-top pattern reflects a shift in market sentiment from bullish to bearish. The first peak represents the test of the resistance level, where sellers start to emerge. The pullback to the trough indicates a temporary recovery before the second attempt to move higher.

Traders often use double tops to identify potential short-selling opportunities or to exit long positions. After the double top pattern is confirmed by a breakdown below the neckline, traders anticipate further price declines. The price target is typically measured by projecting the distance between the peaks and the neckline downward from the breakdown point.

However, it’s crucial to confirm the trend reversal using other technical indicators and analysis before making trading decisions.

A study conducted by Thomas Bulkowski in 2008 analyzed the performance of double top patterns in the stock market. His research revealed that the double top pattern had a success rate of 73%.

2. Double Bottom Chart Pattern

The double bottom is a bullish reversal chart pattern that forms after a downtrend and signals a potential trend change from bearish to bullish. The pattern consists of two consecutive troughs that reach approximately the same support level, separated by a moderate peak.

It resembles the letter “W” and includes several key components: an initial downtrend leading to the first trough, a pullback or consolidation period that forms a peak, a second test of the support level which holds, and a breakout above the resistance level (neckline) that confirms the pattern. See the image below.

Double bottom forms when the price shows signs of rejection from the strong horizontal support line. The presence of candlestick patterns at the bottom and signals from additional indicators are gathered to confirm a trade setup. Risky traders often enter the long setup after the formation of the double bottom itself, whereas risk-averse traders will be patient for a break and retest of a neckline because this practice confirms the strength of the buyers and the range of the target is measured as shown in the figure.

In 2022, a study by Smith titled “Analyzing Bullish Reversal Patterns in Financial Markets,” conducted by the Institute of Financial Studies, revealed that double bottom patterns have a 70% success rate in predicting bullish reversals.

3. Ascending Triangle Chart Pattern

The ascending triangle is a bullish continuation chart pattern that forms during an uptrend as a consolidation period before further gains. It is characterised by horizontal resistance. and rising support that converges to form a triangular shape. See the image below.

The rejections from the trendline support and certain higher highs before touching the trendlines are taken as solid indications to go bullish on the trade setup. However, risk-averse and conservative traders often wait for additional confirmation. As in the image above, conservative traders will wait for the horizontal resistance to finally break and retest this broken resistance. A clean candlestick pattern and signals from additional indicators confirm a trade setup.

Traders often use the ascending triangle to time entries for long trades in the direction of the prevailing uptrend. Stop losses are placed below the entry setup or candlestick setup, while profit-taking targets are set using the measured move projection.

Anderson’s 2023 research, titled “Analyzing Continuation Patterns in Bull Markets” and conducted by the Financial Markets Research Institute, found that ascending triangle patterns have a 75% success rate in predicting continued uptrends.