Introduction to Stock Chart Patterns

Stock chart patterns often signal transitions between rising and falling trends. A price pattern is a recognizable configuration of price movement identified using a series of trendlines and/or curves.

When a price pattern signals a change in trend direction, it is known as a reversal pattern; a continuation pattern occurs when the trend continues in its existing direction following a brief pause. There are many patterns used by traders—here is how patterns are made and some of the most popular ones.

Types of Stock Chart Patterns

A price pattern that denotes a temporary interruption of an existing trend is a continuation pattern.

Continuation Patterns

A continuation pattern can be considered a pause during a prevailing trend. This is when the bulls catch their breath during an uptrend or when the bears relax for a moment during a downtrend. While a price pattern is forming, there is no way to tell if the trend will continue or reverse. As such, careful attention must be placed on the trendlines used to draw the price pattern and whether the price breaks above or below the continuation zone. Technical analysts typically recommend assuming a trend will continue until it is confirmed that it has reversed.

If the price continues on its trend, the price pattern is known as a continuation pattern. Common continuation patterns include:

• Pennants, constructed using two converging trendlines
• Flags, drawn with two parallel trendlines
• Wedges, constructed with two trendlines that would converge if they were long enough, where both are angled either up or down
• Triangles are among the most popular chart patterns used in technical analysis since they occur frequently compared to other patterns. The three most common types of triangles are symmetrical triangles, ascending triangles, and descending triangles. These chart patterns can last anywhere from a couple of weeks to several months.

Reversal Patterns

A price pattern that signals a change in the prevailing trend is known as a reversal pattern. These patterns signify periods where the bulls or the bears have run out of steam. The established trend will pause, then head in a new direction as new energy emerges from the other side (bull or bear).

For example, an uptrend supported by enthusiasm from the bulls can pause, signifying even pressure from both the bulls and bears, then eventually give way to the bears. This results in a change in trend to the downside.

Reversals that occur at market tops are known as distribution patterns, where the trading instrument becomes more enthusiastically sold than bought. Conversely, reversals that occur at market bottoms are known as accumulation patterns, where the trading instrument becomes more actively bought than sold.

 

The longer the pattern takes to develop and the larger the price movement within the pattern, the larger the expected move once the price breaks out.

When a price reverses after a pause, the price pattern is known as a reversal pattern. Examples of common reversal patterns include:

• Head and Shoulders, signaling two smaller price movements surrounding one larger movement
• Double Tops, representing a short-term swing high, followed by a subsequent failed attempt to break above the same resistance level
• Double Bottoms, showing a short-term swing low, followed by another failed attempt to break below the same support level