top of page
  • David Yocum

Chart Patterns 101: How to Identify and Trade the Most Common Formations

Updated: Jan 14

Technical analysis is a popular method for traders to identify potential trading opportunities in the financial markets. One of the key tools used in technical analysis is chart patterns, which are visual representations of price and volume data that can provide insight into the likely direction of a security's price. In this post, we will take a closer look at the top 5 chart patterns in technical analysis and provide some tips for identifying and trading each pattern.

 

1. Flag and Pennant:

Flag and pennant patterns are considered continuation patterns, which means that they indicate that the trend is likely to continue in the same direction. These patterns are formed when there is a sharp price move followed by a period of consolidation, during which the price moves sideways or forms a series of lower highs and higher lows.

To identify a flag or pennant pattern, look for a sharp price move that is followed by a period of consolidation. The flag or pennant should be bounded by two parallel trendlines that slope against the direction of the previous trend. The flag is typically a rectangle, while the pennant is a symmetrical triangle.



To determine a price target for a flag or pennant pattern, measure the distance between the start of the consolidation period and the top or bottom of the pattern. This distance can be used to project a potential price target once the pattern completes and the trend resumes.


2. Triangle:

Triangle patterns are considered continuation patterns, which means that they indicate that the trend is likely to continue in the same direction. There are several types of triangle patterns, including symmetrical triangles, ascending triangles, and descending triangles.

To identify a triangle pattern, look for two converging trendlines that connect a series of higher lows for an ascending triangle or lower highs for a descending triangle. Symmetrical triangles are formed when the trendlines converge at an angle and are bounded by a series of lower highs and higher lows.


To determine a price target for a triangle pattern, measure the distance between the highest and lowest points of the pattern and project that distance from the breakout point. This can help provide a potential price target once the pattern completes and the trend resumes.

3. Head and Shoulders:

The head and shoulders pattern is a bearish reversal pattern, which means that it indicates that the trend is likely to reverse downward. This pattern is characterized by a series of peaks and troughs, with the middle peak being the highest.

To identify a head and shoulders pattern, look for a series of three peaks, with the middle peak being the highest. The two outer peaks should be of similar height and the trendlines connecting the peaks and troughs should form a "neckline."


To determine a price target for a head and shoulders pattern, measure the distance between the neckline and the highest peak of the pattern and project that distance downward from the neckline. This can help provide a potential price target once the pattern completes and the trend reverses. 4. Double Top:

The double top pattern is a bearish reversal pattern, which means that it indicates that the trend is likely to reverse downward. This pattern is formed when the price reaches a resistance level twice, creating two peaks.

To identify a double top pattern, look for a series of two peaks that are of similar height and separated by a trough.


To determine a price target for a double top pattern, measure the distance between the neckline and the highest peak of the pattern and project that distance downward from the neckline. This can help provide a potential price target once the pattern completes and the trend reverses.

5. Double Bottom:

The double bottom pattern is a bullish reversal pattern, which means that it indicates that the trend is likely to reverse upward. This pattern is formed when the price reaches a support level twice, creating two troughs.

To identify a double bottom pattern, look for a series of two troughs that are of similar height and separated by a peak.



To determine a price target for a double bottom pattern, measure the distance between the neckline and the lowest trough of the pattern and project that distance upward from the neckline. This can help provide a potential price target once the pattern completes and the trend reverses.

 

In conclusion, chart patterns are a powerful tool in technical analysis that can help traders identify potential trading opportunities in the financial markets. By understanding the characteristics and implications of different chart patterns, such as flags and pennants, triangles, head and shoulders, double tops, and double bottoms, traders can make more informed decisions about when to enter or exit a trade. While no single pattern is guaranteed to be successful, understanding how to identify and trade these common chart patterns can help traders increase their chances of success in the markets.

 

Disclaimer: The content of this blog is for educational and informational purposes only and should not be interpreted as financial advice.

675 views
bottom of page