- Chart patterns are an important aspect of technical analysis.
- If you master one chart pattern and trade with proper risk management rules for a longer period, then you can become a successful trader.
Top chart patterns that every trader should know
- There are several chart patterns that every trader should put their hands on.
- Some of the main chart patterns are discussed here.
They are as follows:
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Head and shoulder pattern
- This is the most important chart pattern in the whole gamut of technical analysis.
- It is a reversal pattern and is generally formed at the top of the market.
- In this pattern, the first left peak that is formed is known as the left shoulder, and after that, the price will break the level of the left shoulder and will immediately take the resistance from there by forming the head of the pattern.
- After taking the support from the neckline, the price will again try to go up further, but it will take the resistance from the above levels by forming the right shoulder, and then it will break the neckline, which will indicate a short entry.
- Here, the target is equal to the vertical distance between the apex of the head and shoulder and the distance from the neckline.
- After a trade entry, if the price closes above the neckline, then a potential failure of the pattern will be indicated, and hence a stop loss can be set above the neckline.
Inverse head and shoulder pattern
- It is exactly the opposite of that of the normal head and shoulder pattern.
- It is formed at the bottom of the downtrend and will also indicate a potential uptrend after a potential breakout from the trend line.
Double top pattern
- It is a trend reversal pattern that is generally formed at the top of the uptrend by indicating a potential reversal.
- In this pattern, price will first make the move and will take the resistance from a certain level, and after the support from the neckline, price will again try to go up but take the resistance from the same level by indicating the formation of a double top pattern.
- This pattern will provide a good risk-to-reward ratio.
- The target for this trade is equal to the distance between the top of the pattern and the neckline.
- Sometimes, this pattern will also fail and will try to form a triple or multiple top pattern, which is also stronger than the double top patterns.
Double bottom pattern
- This pattern is exactly the opposite of the double-top pattern.
- This pattern is formed at the end of the downtrend, which will indicate a new uptrend after a breakout from the neckline.
Ascending triangle pattern
- It is a bullish trend continuation pattern that will confirm the continuation of an uptrend.
- This pattern is bound by 2 trend lines, one is a horizontal line at the top and an upward slope trend line connecting the lower lows.
- This pattern is reliable as compared to the other patterns.
- This pattern will give you excellent targets.
- The first target will be very much equal to the depth of the triangle.
- Targets can also be set at 50% of the depth for the partial exits.
- You can place the stop-loss order below the stop of the trend line.
Descending triangle pattern
- It is a bearish trend continuation pattern that will confirm the continuation of the downtrend.
- This pattern is also bound by 2 trend lines; one is a downtrend slope pattern, and the other is a flat trend line that will connect the lows of the pattern.
- After the confirmation of the breakdown from the lower trend line, a short trend can also be initiated.
- This pattern will also give you excellent targets.
- The 1st target will be equal to the depth of the triangle.
- Here, partial profits can be booked after the price reaches 50% of the depth of the triangle.
Symmetrical triangle pattern
- This pattern will be formed when there is indecision in the stock market.
- This pattern can be easily spotted when the price makes lower highs and higher lows.
- This pattern will be formed when there is equal supply and demand in the stock market.
- Here, trades will only be initiated at breakouts and breakdowns.
- You can enter a long trade when the price breaks the descending upper trend line and sustains above it.
- A sell trade can be initiated if the price breaks the lower trend line and sustains below it.
- This pattern will give 100% of the depth rise or fall of the entire triangle as a target.
- Here, the failure will occur when the price results in a false breakout.
Flag and pole pattern
- It is a continuation pattern that will represent a small break in the market trend.
- It can be easily spotted on the charts as they will appear right after a quick breakout or a breakdown from a triangle range.
- In short trending markets, flags will be formed as prices will consolidate for some time and will again start to move in the same direction.
- This is also the most reliable pattern.
- After the breakout from the prior range, the price will shoot up and will make lower highs and lower lows in case of a bullish flag and pole.
- In the case of a bearish flag and pole, the price will make a higher high and a higher low after breaking down from the previous level.
- Trade can also be initiated once the price breaks the above trend line.
- Here, the target can be set, which can be equal to the distance from the previous breakout to the first high of the flag.
- In a bearish flag and pole pattern, trade will be initiated when the price breaks down from a lower trend line, and the target will be equal to the distance from the previous breakdown to the first support of the flag.
- You can place a stop loss below the low of the flag.
Conclusion
We hope that this blog has given you the most successful and the most frequently occurring chart patterns.
Frequently Asked Questions
Q1) what is the most accurate chart pattern to trade?
Head and shoulders are the most accurate chart patterns to trade.
Q2) which chart pattern is most bullish?
The ascending triangle chart pattern is the most bullish.
Q3) which is the most successful day trading pattern?
The hammer candlestick is the most successful day trading pattern.
Q4) what is the best chart for technical analysis?
A candlestick pattern is the best chart for technical analysis.
Q5) which trading indicator has the highest accuracy?
The Moving Average Convergence Divergence (MACD) trading indicator has the highest accuracy.
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