The Definitive Guide to Trading Price Chart Patterns

On a price chart, you will notice many recurring and repeated price patterns that not only form curious shapes, but also provide predictive value which way price is going to move once the pattern is completed.

In this price chart pattern guide, you will learn:

The 2 main types of price patterns – continuation patterns vs reversal patterns
How to identify important chart patterns like the head and shoulders, cup and handle, bull flag, ascending triangle, falling wedge, etc
And most importantly, how to trade and profit from these patterns

If you like this guide, click here to check out our whole series of free trading guides!

Content Page

beginners guide to trading technical analysis

CHAPTER 1 Introduction to Price Chart Patterns

CHAPTER 2 The 2 Main Categories of Price Patterns

CHAPTER 3 Types of Continuation Price Patterns

CHAPTER 4 Trading Strategies for Continuation Price Patterns

CHAPTER 5 Types of Reversal Price Patterns

CHAPTER 6 Trading Strategies for Reversal Price Patterns

CHAPTER 7 Tips from the Trading Desk

CHAPTER 8 Video Tutorials on Price Patterns

Looking for a particular topic? what are price patterns types of price patterns continuation pattern trading strategy reversal pattern trading strategy tips on trading price patterns video tutorials on price patterns

Chapter 1:
Introduction to Price Chart Patterns

In this chapter you’ll learn exactly what price chart patterns are, how they form, and how to identify them.

We will look at the 2 main types of chart patterns, and the different patterns that fall under each type.

Then, in later chapters, we will go through each pattern in detail, and explain how to trade each pattern.

Now, let’s get started with the basics!

What are Price Patterns & Chart Patterns?

Price patterns, or chart patterns as some people call them, are shapes and formations formed by price movements on the price chart.

By understanding the underlying psychology of how and why they form, it gives traders a deeper understanding of the intentions of various market players (buyers and sellers), and how their battle plays out on the chart.

From a more practical standpoint, it allows you to predict which side will likely win the battle (completion of the pattern), and prepare to take action (learning how to anticipate as the pattern is forming) when the odds are stacked in your favour.

How Do Price Patterns Form & Why are they Important?

As the market moves between the 3 main trends – uptrend, downtrend and sideways, prices have to transit from one trend to another, and these transitions are what leads to the price and chart patterns being formed.

So by studying the patterns, and also understanding the context in which they are formed, it will enable us to make useful predictions as to the most likely outcome of prices once the pattern is completed.

In other words, it gives us high probability predictions of future outcomes, which we can use to tilt the trading odds in our favour.

It is also useful to understand swing counts, and how you can use them to identify the current trend of the market.

These will work hand-in-hand when breaking down and understanding chart patterns as well.

Chapter 2:
The 2 Main Categories of Price Patterns

In this chapter you’ll learn exactly what price chart patterns are, how they form, and how to identify them.

We will look at the 2 main types of chart patterns, and the different patterns that fall under each type.

Then, in later chapters, we will go through each pattern in detail, and explain how to trade each pattern.

Now, let’s get started with the basics!

What are the 2 Main Categories of Price Patterns?

There are 2 categories of price patterns, mainly continuation patterns and reversal patterns. Here is a slide which gives an overview on all the patterns and how they are classified.

Don’t worry, we will be covering each pattern in detail as we progress though the guide!

Continuation patterns, are their name suggests, usually leads to a continuation of the prior price trend.

You are likely to see them in the middle of a trend, when the price is taking a pause, and forms a consolidation to build up the strength for the next leg of movement.

Reversal patterns, on the other hand, usually leads to a reversal or change in the existing trend.

You are likely to see them after a prolonged trend (which has a high chance of coming to an end), when the price is exhausted in one direction and is getting ready to change direction.

Do note that it is much harder to change the direction of an existing trend, hence reversal patterns tend to be larger, and take longer to form and complete.

Next, let’s dive straight in, and study the different types of price patterns!

Just a quick refresher, there are 2 main types of chart patterns – continuation chart patterns and reversal chart patterns.

Continuation patterns continue the existing trend,

eg. downtrend > price pattern > downtrend,
or uptrend > price pattern > uptrend;

whereas reversal patterns change the existing trend,

eg. downtrend > price pattern > uptrend,
or uptrend > price pattern > downtrend.

Chapter 3:
Types of Continuation Price Patterns

Continuation patterns are a pause in the trend, before the trend continues, and they include:

Rectangle pattern
Bull flag & bear flag
Bullish pennant & bearish pennant
Symmetrical triangle
Ascending triangle
Descending triangle

The Trend Affects the Type of Patterns

The type of pattern that is formed generally depends on how far the trend has progressed.

If the trend is in the early stages, it tends to be stronger, so you only get small consolidation patterns, such as the bull flag, bear flag, or pennants.

If the trend is in the later stage, you start to see larger patterns, such as the rectangles and triangles (ascending triangle, descending triangle, symmetrical triangle).

The patterns highlighted in blue, such as the rectangle and symmetrical triangle, are considered neutral patterns, meaning they do not have a directional bias, and prices can break out of either side once the pattern is completed.

On the other hand, the patterns highlighted in red have a bearish bias (descending triangle, bear flag), while those highlighted in green have a bullish bias (ascending triangle, bull flag).

Chapter 4:
Trading Strategies for Continuation Price Patterns

Continuation patterns are useful for trend-followers and breakout traders who want to wait for a good opportunity to get onto the exiting trend, and ride on the momentum.

In this chapter, we provide detailed strategy guides for each continuation price pattern, so that you will know the best way to tackle each of them.

HOW TO TACKLE EACH CONTINUATION PATTERN

The main idea behind continuation patterns is that after the pattern is completed, the trend is expected to continue.

Hence, the best strategy involves finding continuation patterns in the middle of strong trends, and waiting for the opportunity to enter the trade once the trend resumes.

1. PENNANT & FLAG PRICE PATTERNS

The flag pattern and pennant pattern are small consolidation patterns found in very strong trends.

They typically start off with a strong sharp move, followed by a small pause, and then a continuation of the sharp move.

During the small pause, they provide a good high reward, low risk entry opportunity to ride on the next price move.

In this bull flag & bear flag pattern guide, you will learn:

How to trade the different types of flags & pennants – bull flag, bear flag, bullish pennant, bearish pennant
Specific trading strategies to profit from the pennant & flag price pattern
Practical tips from the trading desk for live trading

Coming soon: Bull Flag & Bear Flag Pattern Trading Strategy Guide

2. RECTANGLE PRICE PATTERN

The rectangle pattern is a sideways horizontal consolidation, and can be wide range or narrow range.

The wider the range, the more uncertainty in the pattern, and the more confirmation needed to ensure a good breakout.

The longer the consolidation period, the more pent up energy is stored, which can lead to a longer price movement after the breakout.

In this rectangle chart pattern guide, you will learn:

How to trade the 2 different types of rectangles – narrow range and wide range
Specific trading strategies to profit from the rectangle price pattern
Practical tips from the trading desk for live trading

Coming soon: Rectangle Price Pattern Trading Strategy Guide

3. TRIANGLE PRICE PATTERNS

The triangle price pattern is a type of continuation price pattern, where price get compressed and converge over time.

Depending on the type of triangle pattern formed, it gives you clues about whether the bulls or bears have stronger control over the market, and which side is more likely to emerge victorious when the breakout of the pattern occurs.

In our triangle chart pattern guide, you will learn:

How to trade the 3 different types of triangle patterns – symmetrical triangle, ascending triangle, descending triangle
Specific trading strategies to profit from the triangle price pattern
Practical tips from the trading desk for live trading

Check out the guide: Descending & Ascending Triangle Pattern Strategy Guide

Chapter 5:
Types of Reversal Price Patterns

Reversal patterns usually lead to a change in direction of the trend, and they include:

Expanding triangle
Double top & double bottom
Head and shoulders pattern
Falling wedge & rising wedge
Cup and handle pattern

THE TREND AFFECTS THE TYPE OF PATTERNS

As we mentioned earlier in the introduction to continuation patterns, the type of pattern that is formed generally depends on how far the trend has progressed.

If the trend is in the early stages, it tends to be stronger, so you only get small consolidation patterns, while as the trend gets weaker, you start to see larger patterns.

Finally, as the trend enters the late stage, we will start to see even more trend uncertainty and volatility, which eventually leads to a reversal.

Some patterns, such as the head and shoulders pattern, will reverse and existing trend, whereas others like the cup and handle pattern kickstarts a new trend from a ranging market.

The patterns highlighted in red have a bearish bias (double top, head and shoulders, expanding triangle, rising wedge), while those highlighted in green have a bullish bias (double bottom, inverted head and shoulders, cup and handle, falling wedge).

Reversal patterns usually result in a change in the direction of the trend (bullish pattern reverses downtrend, or bearish pattern reverses uptrend), so if you see a contradicting pattern (bullish reversal pattern in an uptrend, or bearish reversal pattern in a downtrend), then the pattern you see is more likely to be a continuation pattern rather than a reversal pattern.

Chapter 6:
Trading Strategies for Reversal Price Patterns

Reversal patterns are useful for contrarian traders who want to get in early on a new trend, or trend traders who want to know when the current trend will come to an end, so that they can be ready to change direction.

In this chapter, we provide detailed strategy guides for each reversal price pattern, so that you will know the best way to tackle each of them.

HOW TO TACKLE EACH REVERSAL PATTERN

The main idea behind reversal patterns is that after the pattern is completed, the trend is end, and change direction. Hence, the best strategy involves finding reversal patterns in the late stage of trends (which are exhausted), and waiting for the opportunity to enter once the current trend ends and a new one begins.

1. EXPANDING TRIANGLE PRICE PATTERN

The expanding triangle is the opposite of the conventional triangle pattern, because instead of prices converging as the pattern form, we see prices diverging as prices swing wider and wider as they move out from the tip of the triangle.

This creates much volatility and uncertainty in prices, which can often lead to a destabilization (and possible reversal) of the existing trend.

bullish bearish expanding triangle pattern

In this expanding triangle pattern guide, you will learn:

How to trade the different types of expanding triangles – bullish expanding triangle, bearish expanding triangle
Specific trading strategies to profit from the expanding triangle price pattern
Practical tips from the trading desk for live trading

Coming soon: Expanding Triangle Pattern Trading Strategy Guide

2. DOUBLE TOP & DOUBLE BOTTOM PATTERN

The double top (M-top) and double bottom (W-bottom) are one type of common reversal patterns that are found at the end of major trends.

When prices are unable to surpass the prior swing high, it forms a matching high with the prior high, thus forming a M-shaped double top.

When prices are unable to surpass the prior swing low, it forms a matching low with the prior low, thus forming a W-shaped double bottom.

3. HEAD AND SHOULDERS PRICE PATTERN

The head and shoulders and inverted head and shoulders are another type of common reversal patterns found at the end of major trends.

When prices are unable to surpass the prior swing high (the head) and forms a lower high (the shoulder) instead, this forms the bearish head and shoulders reversal pattern.

When prices are unable to surpass the prior swing low (the head) and forms a higher low (the shoulder) instead, this forms the bullish inverted head and shoulders reversal pattern.

In this head and shoulders pattern guide, you will learn:

How to identify and tackle the head and shoulders & inverse head and shoulders pattern
Specific trading strategies to profit from the head and shoulders pattern
Practical tips from the trading desk for live trading

Check out the guide: Head and Shoulders Pattern Trading Strategy Guide

4. FALLING WEDGE & RISING WEDGE PATTERN

The wedge pattern is formed when prices converge, but instead of a “with-trend” breakout in the case of the triangle, for the wedge it is more of a sign of the weakening of the current trend, thus leading to a breakout in the opposite direction.

In a falling wedge (bearish), prices are trending up, but each new high is weaker than before, eventually leading to a breakdown and a reversal into a downtrend.

In a rising wedge (bullish), prices are trending down, but each new low is weaker than before, eventually leading to a breakout and a reversal into an uptrend.

In this falling wedge & rising wedge pattern guide, you will learn:

How to identify and tackle the falling wedge and rising wedge pattern
Specific trading strategies to profit from the wedge price pattern
Practical tips from the trading desk for live trading

Coming soon: Rising Wedge & Falling Wedge Pattern Trading Strategy Guide

5. CUP AND HANDLE PATTERN

The cup and handle is an accumulation buying pattern, which is found during long periods of consolidation, and can lead to powerful explosive moves once the pattern is fully completed.

The “cup” is formed during the long accumulation phase, which is followed by the “handle” which is a small accumulation phase, which ultimately leads to the breakout.

In this cup and handle pattern guide, you will learn:

How to identify and tackle the cup and handle price pattern
Specific trading strategies to profit from the cup and handle pattern
Practical tips from the trading desk for live trading

Check out the guide: Cup and Handle Pattern Trading Strategy Guide

Chapter 7:
Tips from the Trading Desk

When it comes to actual trading, there are many other factors to consider besides the price patterns, which can affect the probability of success of your trades. Some of these are more advanced, so you might also want to revisit this part after having covered some of the other trading guides.

In this chapter, we will talk about the importance of the trend, how to combine chart patterns with other tools, and how to take into account multiple timeframes when using chart patterns.

Trading Price Patterns with the Trend

When looking for price patterns on your chart, it is important to take note of the context in which the patterns appear.

The most important context is probably the trend.

In an uptrend, you want to be looking for continuation patterns, which will give you a good opportunity to get onto the trend, whereas if the trend has been going on for a long time, and you feel that there is a high chance it might be coming to an end soon, then you will want to be looking out for reversal patterns.

For example, if you see a weak reversal pattern (eg. pattern is small relative to the trend) in a strong trend that is relatively new, the odds of a successful reversal are rather slim, so it would be more prudent to continue observing before diving into the trade, or even wait for the reversal pattern to fail and use it as a chance to enter the trend.

Looking at the chart example above of a triangle pattern, although the pattern is technically neutral and can break out in either direction, the odds favour an upside breakout because of the prior uptrend.

Hence when assessing any chart pattern, we need to take into account the prior trend, as well as the context in which the pattern occurs.

COMBINING CHART PATTERNS WITH OTHER TECHNICAL TOOLS

One of the advantages of price patterns is that they are very versatile, allowing you to combine or use them in conjunction with other trading tools or methodologies.

For example, if your main method of analysis is Elliot Wave theory, the continuation price patterns will help you analyse the different consolidation permutations, such as flags, pennants, triangles, etc.

If your main method of analysis is using classical technical analysis methods like trendlines, channels, support & resistance levels, the lines you draw on the chart will quite often encompass various price patterns, and knowing how to identify the patterns will give you an added edge.

If your main method is using technical indicators, then price patterns will help you add a visual dimension to your analysis.

For example, if the current price pattern is a rectangle, then using oscillators might be useful because they can help you trade within the range, but if the pattern is a flag pattern, then you might want to avoid trading against the trend even if the oscillator gives an entry signal.

Another example, if your MACD gives a reversal signal, you can double-check your charts to see if there is any reversal pattern in the works, or any signs that one might be starting to form. So in a sense, they can both act as independent signals for confirmation, since one is mechanical and one is visual.

Price Patterns on Multiple Timeframes

Another interesting feature of price patterns is how they play out across different timeframes.

For example, if you see a pattern on the current timeframe chart you are using, have you wondered how it would look like on a timeframe which is higher or lower?

Looking at the example above, on the left we have a chart which is in the hourly timeframe, and on the right we have the same chart in the daily timeframe.

When you transit from an hourly timeframe to a daily timeframe, what happens is that the prices get “compressed”, because now all those hours are packed into one day.

So in this chart, we see the triangle pattern on the hourly chart get compressed into a pennant pattern on the daily chart.

So you might be thinking, how is this relevant to actual trading?

Well, for starters, this give you more context.

When you are studying the chart pattern on the current timeframe, thinking about how the pattern on the larger timeframe looks like literally gives you a bigger picture, allowing you to strategize your trades better.

Chapter 8:
Price Patterns Video Tutorials

If video is your preferred mode of learning, then you will definitely love this final segment.

In this chapter, we provide video tutorials on all the different price chart patterns, including how to identify, the best trading strategies for each one, and what mistakes to avoid for each pattern.

Enjoy!

For a more detailed explanation, here’s a full video tutorial playlist on all videos on price patterns.

Do note that it is not in sequence, because the most popular videos are shown first.

Here’s a list of all the videos in the playlist in sequence:

New videos on price chart patterns will be added here once they are published.

Conclusion

I hope you have enjoyed this guide on how to tackle price chart patterns.

Now I’ll like to hear from you: what is your key take-away from this trading guide?

What is your favourite price pattern setup for trading?

Do you have any difficulty identifying the patterns on your charts?

How can you combine these patterns with your existing trading tools?

Let me know by leaving a quick comment below right now.

If you like this guide, click here to check out our whole series of free trading guides!

2 replies

Charles says:
June 14, 2020 at 11:18 pm
I’m learning to be a scalp trader I’m going to implement patterns into my trading strategy which I haven’t before. My strategy is reading candle sticks but not the patterns. Thank you
Reply
- Spencer Li says:
  June 15, 2020 at 5:56 am
  You are welcome! As I mentioned in my “Beginner’s Guide”, there are 3 main kinds of analysis: classical (including chart patterns), price action (including candlestick patterns), and indicators. It is best to combine these methods together.
  Reply

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The Definitive Guide to Trading Price Chart Patterns

Content Page

CHAPTER 1

Introduction to Price Chart Patterns

CHAPTER 2

The 2 Main Categories of Price Patterns

CHAPTER 3

Types of Continuation Price Patterns

CHAPTER 4

Trading Strategies for Continuation Price Patterns

CHAPTER 5

Types of Reversal Price Patterns

CHAPTER 6

Trading Strategies for Reversal Price Patterns

CHAPTER 7

Tips from the Trading Desk

CHAPTER 8

Video Tutorials on Price Patterns