Chart pattern for trading is an integral aspect of technical analysis. But it needs some understanding before you can decipher what they mean. Chart patterns are the base for technical analysis and require a trader to understand exactly what they need to look for and how to find it. 

But there are many different patterns to look for, and it is important to recognize the technical trading strategies and implications these patterns highlight.

Chart Patterns For Trading - Table of Contents

What are Chart Patterns?

Chart patterns showcase all the buying and selling that happens in the stock market in a picture format. It offers a complete pictorial trading record and is a framework for analyzing the bear and bullish markets. 

Chart patterns help traders determine who is winning the battle and how they need to position themselves to come out on top. Analyzing these patterns also helps to make short-term and long-term forecasts. The data highlighted in these chart patterns for trading can be based on daily, monthly, or yearly details.

What is the Importance of Analysis of Chart Patterns?

Chart patterns are the perfect way to view price actions that occur in the stock trading period. These patterns tend to repeat themselves and help appeal to a trader's psychology. 

Learning about these chart patterns for trading helps traders gain a competitive advantage over others in the market. Like volume, resistance levels, Fibonacci retracements, and RSI, these stock patterns help identify the reversal and continuation of the market trend.

Types of Chart Patterns

There are three types of chart patterns for trading: 

• Bilateral Patterns: These patterns showcase high volatility and uncertainty in the market.

• Continuation Patterns: This provides a continuous signal of the present trend.

• Reversal Patterns: These showcase a reversal signal of the market.

[ Check out 35 Types of Candlestick Chart Patterns ]

Top 12 Stock Chart Patterns For Trading

1. Head and Shoulders

This bearish and bullish reversal pattern has a large peak in the middle and small peaks on the sides. This head and shoulder pattern type can be considered one of the most reliable reversal chart patterns.

2. Double Top

This chart pattern for trading is a bearish reversal pattern that traders can use. The stock prices form a peak and then retract back to the levels of support. It then forms a peak again prior to reversing back to the prevailing trend.

3. Double Bottom

The double bottom is another bullish reversal pattern that is opposite of the double top. The stock prices form a peak and then retrace back to the resistance level. It then forms a peak once more before reverting back to the previous trend.

4. Rounding Bottom

The pattern is also known as the saucer bottom and is a long-term reversal chart pattern. The rounding bottom highlights that the stock gets reversed from a downward trend to an upward one. 

5. Cup and Handle

The Cup and Handle bullish reversal chart pattern resembles a cup and handle. The cup is shaped like a U, and the handle has a downward drift.

6. Wedges

This pattern can be both a bullish and bearish reversal that is formed when two trend lines converge. This can be a rising wedge or a falling wedge.

7. Pennant or Flags

A pennant or flag pattern is created when there is a sharp movement in the stock in either an upward or downward trend. This is followed by a period of consolidation that helps create the converging lines' shape.

8. Ascending Triangle

This triangle appears when there is an upward trend and is considered to be a continuous bullish pattern.

9. Descending Triangle

Just like the ascending triangle, the descending triangle is also a continuous chart pattern. The only difference is that it is a bearish continuation pattern and is created when a downward trend occurs in the market.

10. Symmetrical Triangle

These triangles can be seen in either bearish or bullish continuation chart patterns for trading and are developed when two lines converge.

11. Bump and Run

This pattern occurs after a fast and huge jump in excessive speculation. This pattern starts with a lead-in phase where the price advances normally but then increases steeply. Once the price reaches the peak and starts declining toward the trending line. The volume expands once the advance forms on the left side of the bump.

12. Gaps

These reversal patterns occur when a major cost increase or decrease causes spaces between two trading periods. There are three main types of gaps - Breakaway, runaway, and exhaustion gaps. 

How To Use Chart Patterns Scanners in StockEdge?

StockEdge provides a deep analysis of stock charts and has this unique feature to identify key patterns. You will also receive stock lists where the respective chart patterns for trading can allow you to capitalize on opportunities in the market. 

The StockEdge Pro version offers 5 categories of chart patterns that cover bullish, bearish, and neutral charts.

Chart Patterns Cheat Sheet

1. Reversal Patterns Cheat Sheet

2. Continuation Patterns Cheat Sheet

Chart Patterns FAQs

1. What are the different chart patterns?

Depending on which traders you connect with, there are more than 35 patterns. Some traders stick to the traditional 12 types, whereas some prefer to categorize them more. 

2. Which chart pattern is the strongest?

The strongest chart pattern is determined by the preference of the trader and the methods they use. But it depends entirely on your requirement and a pattern that works for you. 

3. What do you mean by chart patterns? 

Traders use chart patterns to identify stock pricing trends for trading opportunities. These patterns tell the traders when to buy and which stocks to sell or hold. 

4. What is the purpose of chart patterns? 

Based on past understanding, a chart pattern helps suggest where the stock prices will go next. These chart patterns are the basis of technical analysis that helps traders understand what they are looking at and where to look for it. 

5. Are chart patterns accurate? 

Chart patterns are based on accuracy and reliability but are based on probabilities. For example, based on the market condition, the head and shoulders pattern has a 70% chance of accuracy. 

Conclusion

All the patterns explained above are useful indicators that help traders to understand why or how the stock prices are moving in that specific direction and where they might move in the future. This is because chart patterns for trading can highlight specific areas of support. These patterns can help traders decide whether they should stay in a long or a short position or close their open position in case of a reversal trend.