Chart Patterns
Descending Triangle
Type of pattern: A Descending Triangle pattern is a bearish pattern that usually forms during a downward trend as a continuation pattern. Sometimes a descending triangle can be a reversal pattern at the end of an up trend but is usually a continuation pattern. No matter where they are from they are a bearish pattern. Sometimes you will see a descending triangle have a breakout and go up, even though this does happen it is very usual. Success rate: 55%, which improves to 96% if you confirm the pattern with a close below the downside Breakout. Time-frame/Duration: Triangles can appear over any timeframe, from intraday patterns to patterns taking several months to form. Volume: Decreasing volume through the Triangle, with heavy volume required to break out of the Upper Trend Line Risks: also breakdowns are common at the Lower Trendline. Price will break below the Lower Trendline of the Triangle, and usually return back into the Triangle within the day if the breakout is false. Breakdowns normally require higher volume, but low-volume breakdowns can occur. How to trade the pattern: Keep track of the Lower Trendline of the Triangle pattern. Traders should enter short when the Lower Trendline is pierced on a valid breakout on heavy volume. The key to trading this pattern is to avoid the false breakout, which usually occurs due to insufficient volume. It is also common to see a re-test of the former Lower Trendline, now acting as Resistance, after a valid breakdown. Price target:Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and subtracting it from the resistance breakout. Previous support/resistance lines or trendlines. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Double Bottom Reversal
Type of pattern: A double bottom chart pattern represents a period of reversal from the prior trend, usually marking an intermediate or long-term change in trend. Many potential Double Bottom Reversals can form during a downtrend, but until key resistance is broken, a reversal cannot be confirmed. A W formation occurs to signal the reversal, NOTE: A double bottom had to have a prior downtrend before it. Success rate: A double bottom if fully formed has a 78.55% success rate Time-frame/Duration: Double Bottom Reversal is an intermediate to long-term reversal pattern. Even though formation in a few weeks is possible, it is preferable to have at least 4 weeks between lows. How to trade the pattern: First Trough: The first trough should mark the lowest point of the current trend. Peak: After the first trough, an advance takes place that typically ranges from 10 to 20%. Volume on the advance from the first trough is usually inconsequential, but an increase could signal early accumulation. The high of the peak is sometimes rounded or drawn out a bit from the hesitation to go back down. Second Trough: The decline off of the reaction high usually occurs with low volume and meets support from the previous low. Support from the previous low should be expected. Troughs can range from 3% of each other Advance From Trough: There should be clear evidence that volume and buying pressure are accelerating during the advance off of the second trough. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment. Resistance Break: Even after trading up to resistance, the double top and trend reversal are still not complete. Breaking resistance from the highest point between the troughs completes the Double Bottom Reversal. Like advances, these should occur with an increase in volume and/or an accelerated ascent. Price targets: The distance from the resistance breakout to trough lows can be added on top of the resistance break to estimate a target. This would imply that the bigger the formation is, the larger the potential advance. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Inverse Head and Shoulders
Type of pattern: A inverse Head and shoulders pattern, is a most reliable trend reversal pattern. The pattern appears with a baseline/neckline and three troughs, the 2 troughs on the outside are close in height while the middle has the lowest trough. This is a Bearish to Bullish trend reversal pattern, that tells us a downward trend is nearing its end. Pattern only occurs after a downtrend Success rate: This is a reliable pattern, but couldn't find success rate Time-frame/Duration: This pattern is a mid to long term pattern forming anywhere from 1 month to 1 year. That being said it can also happen in 1 day but doesn't have the same success rate Volume: volume should be descending but have peaks when trying to break neckline Risks: Buying before fully formed, to inverse head and shoulders then not forming. How to trade the pattern: You want to wait till the inverse head and shoulder pattern is fully formed. After it has fully formed and the last shoulder is nearing the neckline, you want to look for higher volume and a bullish candle to break the neckline. After a candle has broken the neck line you should wait for another candle to close above the neckline for confirmation that the neckline is fully broken. That is when you should place a buy order in and look for next resistance for a price target. Price Targets: Previous resistance before the neckline. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Symmetrical Triangle
Type of pattern: A symmetrical triangle chart pattern represents a period of consolidation before the price is forced to breakout or breakdown. A breakdown from the lower trendline marks the start of a new bearish trend, while a breakout from the upper trendline indicates the start of a new bullish trend. The pattern is also known as a wedge chart pattern. Success rate: A symmetrical triangle has a success rate of 75%. To get a greater accuracy wait for it to break down or above the trend lines for a conformation Time-frame/Duration: The symmetrical triangle can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a pennant. Typically, the time duration is about 3 months. Volume: As the symmetrical triangle extends and the trading range contracts, volume should start to diminish. This refers to the quiet before the storm, or the tightening consolidation before the breakout. Risks: False breakouts on low volume, minimize risk by waiting for conformation. How to trade the pattern: To trade a symmetrical triangle properly you want to wait for 2 conformations. First conformation is a breakout through trendline, or break down through trendline. You want to then see a secondary candle take support over or under the trendline to know the wedge has been broken. Lastly you want to buy right after it breaks resistance or support of candles that were in the wedge. Price target: There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the symmetrical triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the pattern's trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target. (the chart below will help you understand more)
Ascending Triangle
Type of pattern: An Ascending Triangle Pattern is a continuation pattern of a bullish trend, usually occurring after a large run up in price. After a brief price consolidation in the "Triangle" with decreasing volume, the trend will usually continue in the same direction as the previous trend. The price target for the next run up in price is approximately the same vertical distance as the open end of the Triangle. Success rate: 68%, which improves to 98% if you confirm the pattern with a close above the upside breakout. Time-frame/Duration: Triangles can appear over any timeframe, from intraday patterns to patterns taking several months to form. Volume: Decreasing volume through the Triangle, with heavy volume required to break out of the Upper Trend Line Risks: False breakouts are common at the Upper Trendline. Price will break above the Upper Trendline of the Triangle, and usually return back down into the pattern within the day (if not the hour!) if the Breakout is false. Greater than 150% of normal volume MUST accompany a valid Breakout. How to trade the pattern: Keep track of the Upper Trendline of the Triangle pattern. Traders should enter long when this Upper Trendline is pierced on a valid Breakout on heavy volume. The key to trading this pattern is to avoid the false Breakout. Price Target: Look for previous resistance for PT, if none 10-20%
Triple Top Reversal
Type of pattern: The Triple Top Reversal is a bearish pattern occurring after an uptrend. The pattern involves three peaks then two troughs usually around the levels with the 3rd trough usually breaking the support. There has to be a prior uptrend for this to be an accurate reverse pattern. Not complete triple top till support breaks Success rate: 75% Time-frame/Duration: 3 to 6 months. Can be used on daily time frame Volume: Overall volume levels decline and sometimes will increase near the peaks (for potential breakout. After the third peak volume should be much more subsequent on the decline. Risks: False breakdowns or breakouts How to trade the pattern: For a full double top you'll need to have three peaks, usually within the same resistance. The first peak should mark the highest point of the current uptrend. Usually after the first peak there is a decline anywhere from 5-20% with lower volume marking the first trough. Afterwards you should see two more peaks evenly spaced out with clear turning points. The peaks should be within 3% of each other. The third decline should have a nice decline and more volume. Once the support breaks and the lowest point is broken (from the first or second trough) then the triple top is complete and you can short it. Make sure to wait for confirmation of candle closing under the support line. Price Targets: Look for previous supports for PT or trendlines. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Head and Shoulders
Type of pattern: Head and shoulders pattern, is one of the most reliable trend reversal patterns. The pattern appears with a baseline/neckline and three peaks, the 2 peaks on the outside are close in height while the middle is the highest one. This is a bullish to bearish trend reversal pattern, that tells us an upward trend is nearing its end. Pattern only occurs after a uptrend. Success rate: The head and shoulder pattern has a projected 85% success rate. Time-frame/Duration: This pattern is a mid to long term pattern forming anywhere from 1 month to 1 year. That being said it can also happen in 1 day but doesn't have the same success rate Volume: During the formation of the head and shoulders you want to see a steady decrease in volume like a descending triangle. At the end of the last shoulder when it breaks through the neckline you want to see a higher volume Risks: Shorting the trend before the pattern has fully formed. Wait for confirmation of neckline break and pattern fully formed before shorting How to trade the pattern: You want to wait till the head and shoulders are fully formed. Once the last shoulder is formed you want to wait for it to break the neckline. After the neckline is broken you want to wait for a candle to form under the neckline to know that the neckline has been fully broken. After you have confirmed the neckline is broken, you should short the stock to it's next support. Price Targets: Look for next support after the neckline is broken. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Rounding Bottom
Type of pattern: Rounding Bottom also referred to a saucer bottom is a long term reversal pattern best suited for weekly charts. It shows a long consolidation period that marks a change from a bearish bias to a bullish bias. There must be a downtrend to reverse from Success rate:High success rate Time-frame/Duration: medium to long term Volume: The volume should follow the rounding bottom. At the beginning high volume and as it lowers to its bottom the volume should lower. When it starts to advance up again so should the volume Risks: Fake bottoms. People will buy thinking its the bottom but it really isn't. A cup and handle might form How to trade the pattern: In order to be a rounding bottom there has to be a previous trend. The first portion should be a decline, till it makes a low with a "V" bottom shouldn't be too sharp though. Then you should see an advance and an uptrend forming. The bullish confirmation comes when the pattern breaks above the reaction high that marked the decline. You should wait for it to break, then put a buy order in. To ensure it's not a false breakout wait for a candle to close above reaction high Price Targets: Price target can be the same area of the rounding bottom. What i mean by that is to put the rounding bottom in a square box and then copy that square box on top of the breakout and you should see Price target
Rounding top
Type of pattern: Rounding top also referred to a saucer top is a long term reversal pattern best suited for weekly charts. It shows a long consolidation period that marks a change from a Bullish bias to a bearish bias. Their must be a uptrend to reverse from Success rate:High success rate Time-frame/Duration: medium to long term Volume: The volume should follow the rounding bottom. At the beginning high volume and as it gets closer to the top lower volume. When it starts to advance down again the volume should start to pick up. Risks: Fake Tops. People will short thinking it's the top but it really isn't. A inverse cup and handle might actually form How to trade the pattern: In order to be a rounding bottom there has to be a previous uptrend. The first portion should be inclined, till it starts to round out with doji candles. Then you should see a downtrend forming. The bearish confirmation comes when the pattern breaks below the support line. You should wait for it to break, then put a Short order in. To ensure it's not a false breakout wait for a candle to close below the support line. Price Targets: look for previous support/trendline
Double Top Reversal
Type of pattern: The Double Top Reversal is a bearish pattern occurring after an uptrend. The pattern involves two peaks then one trough. There has to be a prior uptrend for this to be an accurate reverse pattern. Success rate: 75% Time-frame/Duration: 3 to 6 months. Can be used on daily time frame Volume: During the first trough should have lower volume. Second peak usually low volume Risks: False breakdowns. Pattern can change into a triple top. How to trade the pattern: For a full double top you'll need to have two peaks, usually within the same resistance. The first peak should mark the highest point of the current uptrend. Usually after the first peak there is a decline anywhere from 5-20% with lower volume marking the first trough. The low's can sometimes be rounded or drawn out a bit. The second peak should have lower volume then usual and should touch near the first peak/resistance. Should be within 3% range. The second decline should have a faster descent and more volume. Once the support breaks and the lowest point is broken (from the first trough) then the double top is complete and you can short it. Price Targets: Look for previous supports for PT or trendlines. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Rising Wedge
Type of pattern: The Rising Wedge is a bearish reversal/continuation pattern that begins wide at the bottom and contracts as the price moves higher/slopes up and the trading range narrows. As a continuation pattern, the rising wedge will still slope up, but the slope will be going against its prevailing downtrend, then when the wedge is finished will continue the downtrend. As a reversal pattern, the rising wedge will slope up with the prevailing trend. No matter what rising wedges are bearish. Success rate: High success rate Time-frame/Duration: 3-6 months Volume: The volume will ideally decline as the price rises and the wedge evolves Risks: Hard to accurately know if its a rising wedge, and will sometimes mess up pattern How to trade the pattern: To qualify as a rising wedge there must be a prior trend to reverse from. To mark a rising wedge it takes at least 2 highs to form (highs should be higher than previous highs), and at least two lows (each low should be higher than the previous low). As the pattern matures the lower and upper trend line should start to converge. Nearing the end of the wedge the support line should be broken, and go lower than the previous low. After you have that confirmation you can put a short order in to previous support or trend lines Pt: Previous tend line or support. NOTE: When a resistance line is broken it becomes a support, and vice versa.
Falling Wedge
Type of pattern: The falling wedge is a bullish reversal/continuation pattern that begins wide at the top and contracts as the price moves lower/slopes down and the trading range narrows. As a continuation pattern, the rising wedge will still slope down, but the slope will be going against its prevailing downtrend, then when the wedge is finished will continue the uptrend. As a reversal pattern, the falling wedge will slope down with the prevailing trend. No matter what rising wedges are bullish. A falling wedge will no be realized as bullish until trend line breakout occurs Success rate: High success rate Time-frame/Duration: 3-6 months Volume: The volume will ideally decline as the price rises and the wedge evolves, but when the breakout happens above the trendline the volume will increase Risks: Hard to accurately know if it's a falling wedge, and will sometimes mess up the pattern. False breakout also occur How to trade the pattern: To qualify as a falling wedge there must be a prior trend to reverse from. To mark a falling wedge it takes at least 2 highs to form a resistance line (highs should be lower than previous highs), and at least two lows (each low should be lower than the previous low) to form a downtrend line. As the pattern matures the lower and upper trend line should start to converge. Nearing the end of the wedge the Resistance line should be broken, and go higher than the previous though. After you have that confirmation you can put a buy order in to previous resistance or trend lines Price Targets: Previous resistance or trendline. NOTE: When a resistance line is broken it becomes a support, and vice versa.
