Stock chart patterns to look for

Stock charts can come in various shapes and sizes, and knowing what they represent is of utmost importance. However, knowing the type of pattern on its own will not give you the information you need to follow the market. There are a plethora of common patterns that can appear in a stock chart. These patterns are common sequences of price actions for a stock. Each of these can tell you a different story regarding how a certain stock has fared in the past, how it is fairing, and how it will likely fair in the near future. So, with this information, a trader should be able to decide what to trade, what stock to abandon, and to generally become more informed. Once these patterns are set in your brain, you should be able to have a more well-rounded ability to trade in stocks.

Traders generally divide chart patterns into two separate categories, reversal and continuation patterns.

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Reversal chart patterns

A reversal pattern signals an oncoming change in the current direction of the price change of a stock. It indicates that the bulls (in an upward trend), or the bears (in a downward trend) are losing momentum. These patterns are an indication to traders to quickly adjust their strategy. Some of the most common of these patterns are: Head and Shoulders, Double Top and Double Bottom, Wedges (Rising and Falling), and Triple Tops and Bottoms.

Head and shoulders

You can see traders rely on this sort of pattern very often, as it arises quite frequently and is relatively easy to spot. They show that a trend that is currently bullish will soon be reversing. You can spot them when three peaks appear in the chart. The middle peak tends to be the highest, while the other two are of relatively equal size. The second trough will, however, be lower than a first. You should be paying close attention to the third peak and where it ends up, once the previous indicators have appeared.

So, while this kind of chart pattern appears innocent enough at first, it is actually and an indication that you should prepare for a reversal soon.

Double Top and Double Bottom

If a stock reaches its top price (resistance) and bottom price (support) twice in quick succession, you may be seeing this pattern. If the pattern has not made any significant movement between these two peaks or troughs, a reversal will most likely follow soon. Once the resistance or support is reached again, you should keep a close eye on what will happen next.

Rising and Falling Wedge

The wedge chart patterns show a wide range of highs and lows of prices at the bottom or top (depending on whether it is a rising or falling pattern), followed by a much narrower range at the opposite end. Once the prices become very narrow, it is an indication that you should change your strategy soon.

Triple Tops and Bottoms

These are a rarer pattern, but quite reliable and easy to spot. Once a stock price reaches a peal or trough three times in a row, things are very likely to change quickly. Since the price of the stock attempts to break new grounds but is unsuccessful, traders will likely soon move to the opposite strategy.

Continuation chart patterns

As the name suggests, continuation chart patterns are the opposite of reversal patterns in that they predict the current trend to continue. They are indicators that there is currently nothing worth worrying about, and that traders can relax for the time being. Some of the most common of these patterns are Triangles (Symmetrical, Ascending, and Descending), Cup and Handle, and Pennant.

Triangles

So there are three types of triangle patterns, these are: ascending, descending, and symmetrical.

An ascending triangle shows a flat, stable rise on the highs, with rising lows. This pattern is likely to indicate a continuation in prices right now, with a sudden huge breakout for a bullish trend.

A descending triangle will be the opposite of this. It will show the lower prices remaining steady and the upper rises decreasing over time. At some point, when the upper prices get very close to the lowers, you should expect the downward momentum to increase.

Finally, a symmetrical pattern shows both the lows and the highs meet each other. As the supply and demand of a product become balanced, a breakout is likely to occur. It will be unclear in which direction this breakout will be, though. This will be up to your own discretion.

Cup and Handle

This type of chart pattern will show a U shape (the cup) between a brief rise and fall (the handle). The direction of the rise and fall around the cup is the ultimate indicator of the overall trend. If the cup was preceded by a rise, a rising pattern is expected to continue overall. If the cup is preceded by a fall, a falling pattern is expected to continue. Since these patterns have so many components, they tend to take place over a large period of time. Therefore, a trader must be patient if they want to make sure that this is the pattern they are seeing.

Pennant

This pattern has two distinct components. First of all, there is the flagpole. The flagpole shows a long period of a stable but sharp rise or fall.

This is then followed by the pennant. The pennant shows a brief period of time where the prices consolidate. The highs and lows start to approach each other until they meet. Once they do meet, the pattern continues according to the trend set by the flagpole. The pennant shows a period of hesitation because of a previous sudden change, after which investors continue with their previous strategies.

What to keep in mind about stock chart patterns

So, now that we have told you all the different patterns to keep your eyes out for, we must make an addendum. There are few things to keep in mind when using these patterns. First off, try to learn all of these patterns. Alone these chart patterns are useful, but together they can indicate far more to you. One pattern may look a certain way at first, but can actually be a completely different pattern, which becomes apparent with time. You might not be aware of this second pattern if you did not study it.

Secondly, try to follow these patterns closely. Many of them indicate a price change before any official figures are published, so they are a very effective tool.

Thirdly, do not rely on these patterns too much. These patterns are only indicators of future prices. Some are stronger indicators; some are weaker. You may convince yourself that a pattern is forming, indicating, say, a continuation. However, some sudden news could result in the reversal of a price that you had not expected. Try not to be too stubborn, go with the feel of the market sometimes. If you want to be a successful trader, you will need to be flexible. This means using all the tools at your disposal.