5 best technical analysis chart patterns

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Understanding chart patterns was one of the first things I was introduced to when learning to trade. Chart patterns form part of the basic framework of classic technical analysis and I believe every technical trader should have at least a basic understanding of common chart patterns. Chart patterns repeat themselves over and over again across all markets, trading charts and every time frame. Chart patterns can be used to enter trades, as a tool for adding weight to a trade idea or develop an expectation for market direction and magnitude of a move. In this post I would like to share what I believe to be the 5 best technical analysis chart patterns. I have developed this list from my own research and trading experience.

From my experience and personal opinion the 5 best technical analysis chart patterns in order of reliability are: the head and shoulders, bullish and bearish rectangle patterns, Triple top and bottom, double top and bottom, and bullish and bearish flag. Being able to recognize and understand these patterns will help develop a solid contextual understanding of the market and an expectation of where the market is going next.

In the following post I will describe each of these patterns in detail:

5 best technical analysis chart patterns

Head and Shoulders

The head and shoulders pattern is one of my favorite reversal patterns. It’s possibly the most well recognized and reliable reversal charting patterns across all markets and time frames. It can represent a significant turning point or ‘reversal’ in the market or a short term correction. The classic head and shoulders pattern signals a bearish move and the ‘inverted’ head and shoulders pattern signals a bullish move.

‘Head and shoulders pattern is one of the most reliable chart patterns’.

The geometry of the head and shoulders pattern is a series of peaks and troughs forming the 2 shoulders and the head of the pattern. It is typically found at the top or bottom of an extended move and can represent a shift in market sentiment and a potential reversal.

5 best technical analysis trading patterns - Head and shoulders pattern
5 best technical analysis chart patterns – Head and shoulders pattern – Showing decreasing volume on each trough. Neckline joining pecks between each trough. Spike in volume on the breakout above the neckline.

The geometry of the head and shoulders pattern is a peak in the market, followed by a second higher peak, followed by a third peak, that is lower than the second peak.

To help illustrate the pattern geometry refer to the figure above. In the above example is the classic head and shoulders pattern. Initially the buyers are in control, driving the market up to a certain level, then sellers take back control driving the market down to form the first peak. Buyers then take back control, driving price up to form the head of the pattern. Sellers then get back in control to form the second trough, before buyers take back control to form the second shoulder which is the third peak. The pattern is then completed when the market sells off again and the neckline of the pattern is broken. The neckline is an area of support or resistance. It is formed by tracing a line between the apexes of the two troughs formed between the shoulders and the head of the pattern.

The expectation is that once the neckline is broken the market will continue to sell off . The pattern represents the markets efforts of push higher three times and then fails with sellers taking control.

A stronger pattern is formed when the neckline trends in the direction of the expected move.

The ‘reverse’ head and shoulders pattern is simply a mirror image of the classic head and shoulders pattern. It however represents a reversal from a bearish trend to a new bullish move. The reverse head and shoulders is defined as a trough followed by a second lower trough followed by a third higher trough.

Volume provides added confirmation of the pattern formation. Looking for declining volume on each the shoulders and head. Volume on the head should be lower than volume on the head and volume on the right shoulder should be lower than volume on the head. On the break of the neckline, look for rising volume to confirm the breakout.

Once the breakout is complete the expectation is that the market will move an amount equal to the difference between the head of the pattern and the neckline. In really strong moves price often trades well beyond these levels and typically in ratios of this distance.

Double top and bottom

The double top and bottom patterns are two of the most common reversal patterns. These patterns are very common on almost all charts and for this reason must be used sparingly and with confirmation. The double top and bottom are most useful when seen after an extended move since they’re considered a reversal pattern and can signal a change in trend direction. The double top pattern represents a bearish signal and the double bottom a bullish signal.

5 best technical analysis trading patterns - Double bottom pattern
5 best technical analysis chart patterns – Double bottom pattern – Showing decreasing volume as pattern matures. Spike in volume on the breakout above resistance.

The geometry of the pattern is formed by 2 attempts to continue to push higher or lower that eventually fails and the prevailing trend reverses. In the case of the double bottom shown above, initially sellers have control. The market sells off to make a significant low. At this level buyers step in and push the price higher. Sellers then take back control at resistance forming a peak and price returns to the previous low. At this level price finds support and buyers step in to take back control and push the price higher again. The pattern theory says that after two failed attempts to push the price lower sellers are less likely to step in again. Once price returns to previous high and buyers take control of price and the market rallies dramatically above this level.

Similar to all these patterns, it is best to trade the patterns with volume. Volume provides confirmation of the pattern formation. Look for decreasing volume on the second peak or trough. To confirm the pattern breakout look for an increase in volume on the break of either support for a double top or resistance for a double bottom.

Once the breakout is confirmed the minimum expectation is that the market will move an amount equal to the distance between the peak/s and trough/s of the pattern.

Major price pattern technical principle:  The longer a pattern takes to form and the bigger the price moves within the pattern, the more significant the move is likely to be.

Triple top and bottom

The triple top and bottom patterns are very similar to the double top and bottom. It to signals a potential market reversal. The triple top pattern represents a bearish signal and the triple bottom a bullish signal. The same theory applies to the triple top and bottom pattern as the double top and bottom a patterns. However since the market has made 3 attempts to push higher or lower and the battle between buyers and sellers is more prolonged. The triple top and bottom patterns are considered more powerful than their equivalent double top and bottoms counterparts and the breakout move is typically expected to be larger.

The geometry of the pattern is formed the same as the double top and bottom. In this case 3 attempts to push higher or lower eventually fail and the prevailing trend reverses.

5 best technical analysis trading patterns - Triple Top pattern
5 best technical analysis chart patterns – Triple Top pattern – Price bound between support and resistance. Showing decreasing volume as pattern matures. Spike in volume on the breakout above resistance.

In the case of the triple top, initially buyers have control and the market pushes up to make a significant or a new high. Sellers then step in and push the price lower. Buyers then take back control forming a trough and price returns to the previous high. At this level price finds resistance and sellers step in to take back control and push the price lower again. Here the pattern looks very similar to the double top pattern. This is why it’s so important to confirm the break. Many of these patterns look very similar. therefore look for confirmation from either a clean break or volume spikes, preferably both. In the case of the triple top instead of price failing at support, buyers step back in to push prices higher. Prices return to their previous highs before being meet by more selling and the market sells off once again. Now the pattern theory says that after this third failed attempt to push the price higher buyers are even less likely to step in again once price returns to previous low and the sellers take control of price and the market sells off dramatically below this level.

Volume provides confirmation of the pattern formation. Look for decreasing volume on each peak or trough. To confirm the pattern breakout look for an increase in volume on the break of either support for a triple top or resistance for a triple bottom.

Once the breakout is confirmed the expectation is that the market will move an amount equal to the distance between the support and resistance levels formed by the peaks and troughs.

Major price pattern technical principle: The more often the price fails to break a defined support or resistance pattern boundaries, the bigger and more significant the move is likely to be.

Bullish and bearish flag

Flag patterns are often seen in trending moves and represent a brief consolidation before the market continues to trend. These patterns are often referred to as continuation patterns and are only relevant in a trending market and shouldn’t be traded in sideways or flat markets.

The geometry of the bullish flag pattern is a strong bullish trending move followed by a series lower lows and lower highs. This consolidation forms a downward sloping channel. Forming a ‘flag’. The peaks and troughs form diagonal lines of support and resistance. The expectation is that the market will eventually break in the direction on the prevailing trend and the trend will continue.

5 best technical analysis trading patterns - Bullish flag pattern
5 best technical analysis chart patterns – Bullish flag pattern – Showing decreasing volume as pattern matures. Consolidation forms a downward sloping channel. Spike in volume on the breakout above resistance.

A stronger pattern is formed when the a tight flag formation is produced. The higher and tighter the flag pattern the higher the probability of the market breaking in the direction of the prevailing trend.

Volume again provides confirmation of the pattern formation. Look for decreasing volume as the consolidation matures. To confirm the pattern breakout look for an increase in volume on the break of either resistance for a bull flag or support for a bear flag.

Once the breakout is confirmed the expectation is that the market will move an amount equal to the trending move prior to the consolidation. This target is always the minimum objective.

Bullish and bearish rectangle continuation pattern

The bullish and bearish rectangle pattern is really a derivative of the flag pattern. I like to consider it separately because it has a significantly better success rate than the typical flag setup.

Like the flag pattern the rectangle pattern is a continuation pattern. It represents a brief consolidation in the prevailing trend before the market continues in its original direction. Like the flag pattern, the rectangle pattern is only relevant in a trending market and should be ignored in sideways markets.

5 best technical analysis trading patterns - Bullish rectangular pattern
5 best technical analysis chart patterns – Bullish rectangular pattern – Showing decreasing volume as pattern matures. Consolidation forms between horizontal support and resistance. Spike in volume on the breakout above resistance.

The rectangular pattern forms similar to the double top and bottom or triple top and bottom patterns. Prices trade up and down between horizontal support and resistance. Price control shifts between buyers and sellers until one side prevails over the other. In the bullish rectangle we are looking for price to break to the upside and for the bearish rectangle we are looking for price to break to the downside.

Similar to the double top and bottom and triple top and bottom, volume provides confirmation of the pattern formation. Look for decreasing volume as the pattern matures. Since this pattern is so similar to these other patterns the best way to confirm a valid breakout is by using volume. To confirm the pattern breakout look for an increase in volume on the break at either support or resistance.

Once the breakout is confirmed the minimum expectation is that the market will move an amount equal to the distance between the support and resistance levels formed by the peaks and troughs. The same as many of these patterns, in really strong moves price often trades well beyond these levels and typically in ratios of this distance.

Summary

  • From my research and personal opinion the 5 best technical analysis chart patterns are head and shoulders, bullish and bearish rectangle patterns, Triple top and bottom, double top and bottom, and bullish and bearish flag.
  • Head and shoulders, triple top and bottom and double top and bottoms are some of the most powerful reversal patterns.
  • Bullish and bearish flag and bullish and bearish rectangular patterns are powerful continuation patterns.
  • Head and shoulders pattern is probably the most reliable chart pattern.
  • All chart pattern breakouts should be confirmed with volume.
  • The more often the price fails to break a defined support or resistance pattern boundaries, the bigger and more significant the move is likely to be.
  • The longer a pattern takes to form and the bigger the price moves within the pattern, the more significant the move is likely to be.

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