Content
What are classic chart patterns?
Flags
Bullish flag
Bear flag
Pennant
Triangles
Ascending Triangle
Descending triangle
Symmetrical triangle
Wedges
Rising wedge
Descending wedge
Double top and double bottom
Double top
Double bottom
Head and shoulders
Reverse head and shoulders
Summary
What are classic chart patterns?
There are many ways to study financial markets using technical analysis (TA). Some traders use indicators and oscillators, some rely only on price action in their analytics.
Candlestick charts display price changes over time. The point is that repeating patterns can be identified in the historical movement of an asset's price. Candlestick patterns can tell a lot about an asset from its chart, and traders often take advantage of this in the forex, stock and cryptocurrency markets.
The most common of these patterns are collectively called classic charting patterns. These are some of the most famous patterns, which for many traders are reliable trading indicators. Why? Isn't trading and investing about finding unique signals that others haven't found? Yes, but they are also connected with the psychology of the crowd. Since technical models are not based on any scientific principles or physical laws, their effectiveness largely depends on the number of market participants using them.
Flags
A flag is an area of consolidation that is directed against a long-term trend and is formed after a sharp price movement. This area of the chart is similar to a flag on a flagpole, where the flagpole is an impulse movement, and the flag is an area of consolidation.
Flags can be used to identify potential trend continuation. Additionally, the trading volume accompanying the pattern is important. Ideally, an impulse move should occur on high volume, and the consolidation phase should have lower, decreasing volume.
Bullish flag
A bull flag occurs during an uptrend, follows a sharp rise and, as a rule, the uptrend continues after that.
Bear flag
A bear flag occurs during a downtrend, follows a sharp decline and, as a rule, the downtrend continues after that.
Pennant
Pennants are variants of flags in which the consolidation area has converging trend lines, more like a triangle. Pennant is a neutral formation; its interpretation largely depends on the context of the pattern.
Triangles
A triangle is a chart pattern that is characterized by a converging price range and is usually followed by a continuation of the trend. The triangle shows a pause in the main trend, but may indicate a reversal or continuation.
Ascending Triangle
An ascending triangle is formed by the intersection of a horizontal resistance line and an uptrend line drawn through a series of increasing lows. This means that every time the price bounces off horizontal resistance, buyers enter with higher prices, creating higher lows. Tension builds in the resistance area, and if price breaks through it, it is usually followed by a quick spike with high volume. Thus, the ascending triangle is a bullish pattern.
Descending triangle
A descending triangle is the reverse version of an ascending triangle. It is formed when there is a horizontal support area and a downtrend line drawn through a series of decreasing highs. Just like the ascending triangle, each time price bounces off horizontal support, sellers enter at lower prices, creating lower highs. If price breaks through a horizontal support area, it is usually followed by a quick move lower with high volume. So this is a bearish pattern.
Symmetrical triangle
A symmetrical triangle is formed by descending upper and ascending lower trend lines, which have approximately the same slope. The symmetrical triangle is neither a bullish nor a bearish pattern, since its interpretation largely depends on the context (the underlying trend). It is considered a neutral pattern, demonstrating a period of consolidation.
Wedges
A wedge is drawn by converging trend lines and indicates narrowing price action. Trend lines in this case show that the highs and lows are rising or falling at different rates.
This could mean a reversal is looming as the underlying trend weakens. A wedge pattern can be accompanied by decreasing volume, which also indicates weakening trend momentum.
Rising wedge
A rising wedge is a bearish reversal pattern. It indicates that as the price narrows, the uptrend becomes weaker and may break through the lower trend line.
Descending wedge
A falling wedge is a bullish reversal pattern. It indicates that as prices fall and trend lines narrow, tension increases. A falling wedge is often followed by a breakout to the upside with an impulse move.
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Double top and double bottom
Double top and double bottom patterns occur when the market moves in an M or W shape. It is worth noting that these patterns can be effective even if the respective price levels are not the same, but are close to each other.
Typically, two low and high points are accompanied by higher volume than the rest of the pattern.
Double top
A double top is a bearish reversal pattern in which price peaks twice and fails to break higher on the second try. At the same time, the drop between the two peaks should be small. The pattern is confirmed when the price, after the second high, breaks the local low between the two tops.
Double bottom
A double bottom is a bullish reversal pattern in which the price makes a low twice, followed by a significant rise. As with a double top, the rebound between the two lows should be moderate. The pattern is confirmed when the price, after the second high, breaks the local low between the two tops.
Head and shoulders
Head and Shoulders is a bearish reversal pattern with a base line (“neck”) and three tops. The two side peaks should be approximately at the same level, and the middle peak should be higher than them. The pattern is confirmed when the price breaks the neck support line.
Reverse head and shoulders
As the name suggests, this pattern is the opposite of the head and shoulders pattern and indicates a bullish reversal. A reverse head and shoulders pattern forms when price falls to a lower low in a downtrend and then bounces back to a support line at approximately the same level as the first low. The pattern is confirmed when the price breaks the neckline resistance and continues to rise.
Summary
Classic chart patterns are the most common TA patterns. However, like any other method of market analysis, they should not be considered in isolation from other indicators. What works well in one market environment may not work in another. So it’s always a good idea to find evidence for them while implementing proper risk management.
If you want to learn more about candlestick patterns, check out our article, “12 Popular Candlestick Patterns Used in Technical Analysis.”