Trade Like a Pro: 10 Vital Chart Patterns for Success

Technical analysis is a powerful tool for understanding market movement. It uses charts to identify patterns and trends that can help traders make informed decisions.

One of the most important aspects of technical analysis is understanding chartist patterns. Chartist figures or patterns are patterns that can be found on charts and that often indicate future price movements.

In this article, we will discuss the 10 most important chartist patterns. We will also explain what chartism is, what trends are, and the main differences between support and resistance.

By the end of this article, you will have a solid understanding of chartist figures and how they can be used to trade the markets.

Let’s start!

chaert patterns how to use them

What are Chart Patterns In Trading? – Understanding The Chart patterns

The origin of the word “chartism” or Chart Patterns is associated with the English term “chart”, which literally means “graph”.

In this way, chartism is a technique used in the technical analysis of trading that focuses on the observation of patterns in trading charts to predict future market movements. The main objective of chartism is to identify the movement patterns in prices that may indicate an impulse or a change in trend in the market.

In other words, through price action, volume, and chartist trading patterns, they seek to anticipate how the price of a financial asset will move.

For this, they are based on three precepts:

  1. The price discounts everything
  2. History repeats itself
  3. The price moves in trends

👉 For more information: Best Trading Indicators to use

Nevertheless, before we start with the different figures that can be created, we have to know two basic ideas:

  • What are supports and resistances?
  • How are trends formed?

The Essence of Chart Patterns Analysis: Support and Resistance

Supports and resistances are essentially the lines with which the different figures that can be created are formed, which we will see later. Therefore:

Support: The bottom line

Support is a specific price level at which it is expected that the market will have difficulty falling below. It is a price level that has been tested several times in the past and at which buyers have shown themselves willing to enter the market and buy, which causes the price to recover.

The support is based on the idea that prices will not fall below a certain level due to the buying pressure at that price level. If the price falls near the support level and then rebounds, it is said that a rebound has occurred from the support level. Consequently, traders can use this rebound as a buy signal in the market

Example of support line on Inditex (ITX) stock

Resistance: The top line

And resistance will therefore be the opposite of support.

That is, resistance is a price level at which traders have shown themselves willing to sell, which causes the price to stop or retreat. This level is due to the selling pressure at that price, which makes prices not rise beyond that level. 

Traders use resistance as a sell signal in the market and identify it through technical analysis of price patterns, such as the use of trend lines and observation of market movements.

Visually on the chart, it is demonstrated by a straight line around a price that is difficult to surpass.

Example of resistance on a Bitcoin chart

See in the Bitcoin chart how, during the last few months, at the end of 2022, Bitcoin tried several times without success to break an important resistance around 17,800 dollars, and how after several attempts it finally did it with force.

Trends in Chartist Patterns

In chartism, the trend is the general direction in which the market moves. It is based on the idea that the market moves in trends, which can be bullish, bearish, or sideways.

  • A bullish trend is characterized by ever-higher prices.
  • A bearish trend is characterized by ever-lower prices.
  • A sideways trend is characterized by prices moving in a narrow range without a clear direction.

Therefore, chartist technical analysis is used to identify market trends and determine the general direction in which they are moving.

The 10 Main Chartist Figures

Let’s see the chartist figures most popular among traders, both in terms of trend continuation and change of the same.

These are the six key figures that provide reliability in technical analysis when it comes to identifying trend changes:

  1. Head-Shoulders Chart pattern
  2. Inverse head and shoulder chart pattern
  3. Double Top
  4. Triple Top
  5. Double Bottom
  6. Triple Bottom

Let’s see them in more detail:

1. Head and Shoulders Chart Pattern

Head and Shoulders Chart Pattern (Head-Shoulder Head) is a pattern that belongs to chartist analysis and reflects a change in the quotation. 

It is one of the most important figures for its reliability, but that does not mean it is infallible. and it can be of two types: bearish when it seems that the price is going to turn downward, or bullish, when the price is going to be bullish.

Chartist Figure of Shoulder Head Shoulder

2. Inverse head and shoulder chart pattern

The inverted Head-Shoulder Head is the inverse figure of the HCH. In this case, what it warns us about is a change of trend from a bearish period to a bullish one. The best time to enter is when the price breaks the clavicular line and closes the candle.

Inverted HCH Chartist Figure

3. Double Top

The double top figure warns us of a trend reversal from bullish to bearish. The best time to enter is to bet on shorts to gain from the fall of the stock. Two peaks with a minimum in the middle.

Double top chart figure showing two price peaks with a minimum in the middle.

4. Double bottom

The double bottom is a technical analysis pattern that occurs when the price of a security falls to a low point, rebounds, and then falls to the same low point again before rebounding again. The pattern is considered to be a bullish indicator, as it suggests that the bears are losing control of the market and that the bulls are starting to take over.

The double bottom is composed of two troughs, or low points, that are separated by a rally. The first trough is the initial sign of weakness in the downtrend, and the second trough is a test of the support level that was established at the first trough. If the price breaks above the resistance level that was established at the second trough, it is considered a confirmation of the double bottom pattern.

The double bottom is a good opportunity to buy, especially when the second trough is slightly higher than the first trough. This is because the bears are being squeezed out of the market, and the bulls are starting to take control. 

The sharks, or big players in the market, may take advantage of the first trough to sell, causing the price to suddenly sink. This will trigger stop losses for other traders, who will then sell their positions. The sharks will then buy at these lower prices, causing the price to rise again.

Triple top chart figure showing the fall and rebound of the price of a security

5. Triple top

A triple top is a bearish chart pattern that is formed when the price of a security reaches three consecutive highs, with each high being at roughly the same level. The pattern is usually completed within a period of three to six months.

The triple top is considered to be a reliable indicator of a trend change, as it suggests that the bulls are losing control of the market and that the bears are starting to take over. When a triple top is completed, it is a good opportunity to sell, as the price is likely to decline in the near future.

6.Triple Bottom

A triple bottom is formed when the price of a security reaches three consecutive lows, with each low being at roughly the same level. The pattern is usually completed within a period of three to six months.

The triple bottom is considered a reliable indicator of a trend change, as it suggests that the bears are losing control of the market and that the bulls are starting to take over. When a triple bottom is completed, it is a good opportunity to buy, as the price is likely to rise in the near future.

The triple bottom is composed of four stages:

  • The first drop is formed. At this point, it is not clear whether a triple bottom pattern is forming.
  • The price falls again, and the first drop acts as a support. This is a sign that the bears are losing control of the market.
  • The price is about to fall again, but this time it breaks through the support level. This is a sign that the bulls are taking over.
  • The price continues to rise and breaks through the resistance level. This is a good time to enter a long position.

Here are some additional tips for trading the triple bottom pattern:

  • Look for the pattern to form in a downtrend.
  • The third low should be higher than the first two lows.
  • The price should break above the resistance level that was established at the trough between the second and third lows.
  • The pattern should be confirmed by other technical indicators, such as the moving averages.
Chartist figure of triple bottom showing the three consecutive rise and fall of the price of a security.

We are also going to see different Chart Continuation patterns such as:

7. Flag or pennant (bullish or bearish)

Flag bullish and bearish: Flag patterns help identify price fluctuations.

  • A bullish flag pattern identifies an upward movement that is identified by several consecutive bullish candles with few corrections. 

To take advantage of the moment, the entry must be placed just at the break of the flag, and the stop loss must be placed below the consolidation flag.

  • The main difference with the bearish flag is the direction of the price movement. With a bearish pattern, we would enter short in the bearish direction.

8.Triangle (bullish or bearish)

Triangles are bullish and bearish (symmetrical). Triangles are another of the figures that offer us data on the market situation and are very common. 

Triangles are consolidation figures, and their formation occurs when the price of a stock begins to have bullish or bearish oscillations that decrease, draw resistance, and end up meeting at a point. The break of the resistance gives us an entry point.

symmetrical chartist figure of triangle showing the market situation

9.Rectangle (bullish or bearish)

A rectangle is a chartist pattern that is formed when prices consolidate in a narrow range for a period of time. The formation of a rectangle indicates a consolidation phase in which neither buyers nor sellers have control and the price remains in a narrow range.

Rectangles can be of two types: bullish rectangles and bearish rectangles.

  • A bullish rectangle is formed when prices consolidate in a narrow range after an uptrend, indicating that buyers are taking a break before the uptrend continues.
  • A bearish rectangle, on the other hand, is formed after a bearish trend and suggests that sellers are taking a break before the bearish trend continues.

Traders use rectangles in technical analysis to identify entry or exit opportunities. When the price breaks the resistance line of the bullish rectangle, it is considered a buy signal, while when the price breaks the support line of the bearish rectangle, it is considered a sell signal.

Chartist Rectangle Figure showing the consolidation of prices in a narrow range

10.Wedges (bullish or bearish)

Wedges (bullish and bearish): Bullish wedges are formed by increasing highs, while bearish wedges are formed by increasing lows. In both cases, they are formed by two lines that end up joining at the vertex (like triangles). 

They can appear on any time chart and on any asset. They do not always show a change in trend; sometimes the pattern will be one of continuity. 

How do we know if we are in one case or another? If the break is below, the action will fall, and if it is above, it will rise. The bullish wedge shows an upward inclination, and the bearish wedge is inclined downward.

Graphical representation of bullish and bearish wedges

The information in this article is also presented in John Murphy's book, Technical Analysis of Financial Markets, which is considered to be the bible of technical analysis.

👉 And, if you are curious about the formation of candles, do not miss our next article: Japanese Candle Patterns in Stock Exchange

Technical Analysis of the Ibex Based on Chart Patterns

Finally, let’s apply everything we have learned with an example in the weekly range on the Ibex 35 with dividends, which is how the index should be taken into account for it to be a representative index.

graphical representation of the weekly range on the Ibex 35 with dividends

We can observe after a bearish trend where we see the thirty-week moving average in 2015, that in 2016 there is a double bottom, a clear accumulation figure, and how this is activated to give a bullish stretch to the Spanish stock market.

In 2017, after the trend weakened clearly, we have a clear inverted head and shoulders, another accumulation figure that gives us opportunities to take positions once this figure is broken upwards.

In March 2020, the loss of the average of thirty sessions, similar to the 200 daily, leaves us again with a bearish scenario with the Covid virus and once the lows have been made throughout 2020 we can see how an uptrend flag is left. 

Once the rise is broken again, we have increasing lows and better hopes for the price of the Ibex 35.

As a finale and prior to 2022 we have a double ceiling, a distribution figure where the market turns and fulfills a bearish scenario.

In short, these are the most important chartist figures when it comes to assessing the action of the price and trends in trading. Do you usually guide yourself by chartist patterns? Or do you prefer another type of indicator? Let us know in the comments.

FAQs

What is the most accurate chart pattern?

Studies indicate that the Head and Shoulders pattern is the most accurate and profitable chart pattern, with an 89% success rate, followed by the Double Bottom pattern (88%) and the Triple Bottom and Descending Triangle patterns (87%).

How can I confirm the validity of a chartist pattern before making a trading decision?

It's crucial to consider additional factors for confirmation, such as volume trends, price momentum indicators, and support/resistance levels. These complementary signals can help validate the potential outcomes suggested by chartist figures.

How to read stock chart patterns?

Stock chart patterns are visual representations of the price movements of a stock or other financial instrument over time. They are used by traders and investors to identify potential trend reversals, continuation patterns, and support and resistance levels. Continuation patterns are those that suggest that the current trend is likely to continue. These patterns are often characterized by a consolidation period, followed by a breakout in the direction of the existing trend.

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