Most important patterns in trading: Trading patterns are an important part of technical analysis. It is the long-range direction of an asset’s price. It is charted by drawing lines from the highest price to the lowest price over a period.
Trading patterns are essential for trading in the live market because they help us recognize the direction of the security price. Recognizing trading patterns in the live market makes it very challenging.
Categorization of Trading Patterns
Trading patterns can be applied to all types of charts and can be based on seconds, minutes, hours, days, weeks, and even months. They can be classified into two broad types.
1. Continuation Patterns
These types of patterns show a sign of continuation in one direction. It can be both bullish and bearish.
2. Reversal Patterns
These are consolidation patterns in which the price does not follow the trend but the reversal of existing is on cards. These patterns have the potential to be both bullish and bearish.
#10 Most Important Patterns in Trading
There are different trading patterns that are used to determine the trend of an asset. Here we will be reading about the most commonly used ones.
1. Cup and Handle
The cup and handle are a well-known stock market continuation and one of the most important patterns in trading that indicates a positive market trend. It has a handle after the rounded bottom.
Once finished, the market will break out into a bullish ascending trend. When volumes go down when prices are low, and when there is a breakout, the volume should be up.
There is the inverse cup and handle pattern, which is a bearish continuation pattern. The inverse cup and handle are used to spot bearish trades in the market.
Source – ino.com
2. Double Bottom
A double bottom is a bullish pattern that looks like the letter “W” and indicates that the price has failed to break through the support level twice. It is a reversal chart pattern because it displays a trend reversal. After failing to break through the support two times, the market’s price starts to increase.
Double bottoms are used to analyze short-term trades and long-term trades. Double bottoms used with the trading indicator RSI will give us a better success probability.
Source – daily price action
3. Double Top
When compared to the double bottom, the double top is a bearish reversal pattern that resembles the letter “M.” The trend enters a reversal phase after failing to break through the resistance level twice. The trend then returns to the support level and continues to drop steadily, breaking through the support line.
If the formation is correct and the volumes indicate a decline, then it is a very accurate pattern for short selling.
Source – daily price action
ALSO READ: Charting and Technical Analysis
4. Flag Pattern
The flag pattern is a trend continuation pattern and is formed in a rectangle shape. It occurs after a trend. The rectangle is formed by two trend lines that serve as support and resistance until the price breaks out. The flag will have sloping trend lines that travel in the opposite direction of the initial price movement.
There are two types of flag patterns: bullish and bearish. A bullish flag pattern occurs with a strong uptrend with high buying volumes, and a bearish flag pattern occurs when there is a downtrend.
5. Wedge Pattern
A wedge pattern is characterized by a tightening price movement between the support and resistance lines; it might be rising or dropping. The wedge does not have a horizontal trend line and is defined by either two upward or two downward trend lines.
In the event of a downward wedge, the price is expected to break through the resistance, and in the case of an upward wedge, the price is expected to break through the support. The breakout of the wedge is a reversal pattern since it runs counter to the overall trend.
6. Head and Shoulder Pattern
The head and shoulders chart pattern is a common and easy-to-spot technical analysis pattern that depicts a baseline with three peaks, with the middle peak being the highest. The head and shoulders chart shows a bullish-to-bearish trend reversal and indicates that an upward trend is coming to an end.
This pattern occurs when the price of a stock rises to a peak and then falls back to the same level from whence it began rising. Prices rise again, reaching a peak higher than the previous peak before falling down to the original base. Prices increase once again to form a third peak, which is lower than the second peak and then begin to fall back to the base level. When prices break the baseline with volume, a bearish reversal occurs.
Source – commodity.com
7. Symmetrical Triangles
Symmetrical triangles are bullish and bearish continuation patterns where two trend lines begin to intersect in symmetrical triangles, indicating a breakout in either direction. The support line is drawn in an upward direction, while the resistance line is drawn in a downward direction. Even though the breakout can occur in any direction, it frequently follows the market’s overall trend.
Source – trading strategy guides
8. Ascending Triangles
The ascending triangle is a bullish continuation pattern, and it most likely tells when the stock will breakout. There are two trendlines that determine this. To determine this, two trendlines are drawn over the pattern, and if it forms a triangle, it implies the stock might break out.
Like with all technical indicators, we need to use these ascending triangles with other indicators. Momentum indicators go hand in hand with triangles.
Source – CFI
9. Descending Triangles
In contrast to ascending triangles, descending triangles signal a bearish market decline. A bearish breakout is possible because the support line is horizontal and the resistance line is sinking.
Source – CFI
10. Pennants
A Pennant pattern is a continuation chart pattern and the last one in the list of most important patterns in trading. The pattern resembles a little symmetrical triangle known as a “pennant,” which is composed of several candlesticks. Pennant patterns are classified as bearish or bullish depending on the direction of the movement.
A pennant, which is similar to a flag pattern, is generated when there is a sudden movement in the stock, either upward or downward. This is followed by a consolidation phase, which results in the pennant form as a consequence of converging lines. Then, in the same direction as the massive stock rise, there is a breakout movement.
Pennant patterns, which are similar to flag patterns, often last one to three weeks. High volume precedes the stock movement, followed by less activity in the pennant part, and then a surge in volume at the breakout.
Source – Dstock market
In Closing
The mentioned patterns in this article are the most important patterns in trading, which are used all across financial markets, but learning just about trading patterns is not enough. Technical analysis is a very vast topic with dynamic cases. Implementing our learning in the live market is what really helps.
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