Market charts are one of the most useful visual tools for a trader, especially when we can see or identify chart patterns in this market charts. These patterns can be very useful when coupled with technical analysis tools, in order to have better predictions for a good trading strategy.
In any case, a pattern on a market chart is simply a shape that may occur on a regular basis within the chart of a market. In this way, the trader, by observing a known pattern and understanding how the market has historically acted against that pattern, can prepare his action within that market. This is very useful, especially when accompanied by technical analysis indicators and previous experience with these cases.
However, the existence of these market chart patterns has led traders to create a whole library of them. This in order to more easily recognize them, and better prepare for their visualization. For that reason, in Atani we have dedicated ourselves to create a small library of classic market chart patterns that will help you understand the meaning of them, and adjust your strategy in case you see them in the markets where you participate.
Classification of classic market chart patterns
Before going directly to the patterns, it is important that you know how they are classified. The classification of market chart patterns responds to the need to differentiate their reading within a market. In this sense, each type of pattern has a type of reading, which may or may not be accompanied by technical analysis indicators to give us a more or less correct reading. In any case, it is essential to remember that this type of analysis is highly probabilistic and that absolute certainties do not exist. Therefore, although this type of tools and readings are very useful, they are not 100% infallible, since many elements beyond your control and analysis capacity are involved.
That said, we will begin to show you the different types of classic market chart patterns that you may come across in your trading sessions.
Continuation Chart Patterns
Continuation patterns, as the name implies, show us that a trend within the market (bullish or bearish) will continue for a certain period of time. This means that:
- When we are in a downtrend, this type of pattern indicates the continuity of that downward movement.
- And if we are in an uptrend, this type of pattern indicates the continuity of that upward movement.
These types of patterns indicate both a consolidation of the trend, and also provide entry points for our trading operations. The latter is important, because making a good entry in these patterns is vital to maximize our profits, however, we must be careful at the time, since an unconsolidated continuation pattern (especially bearish ones) can lead to losses.
Some continuation patterns you will see in the markets are:
Bullish channel
The bullish channel chart pattern is one of the most basic continuation chart patterns that exist. This chart pattern is formed by two straight upward parallel lines. These parallel lines are known as:
- Upper straight line or line of resistance.
- Lower line or support line.
Between these two lines we can see how the price of the asset evolves keeping in the range and always upwards. The pattern is considered formed when we can see that the price variation is maintained for at least two periods, being that a period is marked when it passes from a maximum to the minimum indicated by our lower line or support.
In the image you can see an example of this type of pattern, in this case identified in the Ethereum market chart. For its quick study we have used the Atani drawing tool known as “Parallel Lines”, which allows you to create these lines and identify the pattern in a very simple way.
In addition to this, here are some tips for using this type of pattern:
- Watch the creation of short positions (sales) in bullish channels. If you are facing a bullish channel, opening a position when the asset price is close to resistance may lead to little profit. Instead, wait for the asset price to fall to its support line and open a long position, if the indicators show that the trend will continue for longer. This way you will maximize the opportunity for good returns.
- When using the “Parallel Lines” drawing tool, be sure to plot the lines on the candlestick wicks and not on the body. This way, you make sure to take the entire price range of the period you are examining. In addition, this avoids the well-known “false channel breakouts” that can lead you to believe that the trend is continuing when the opposite is true.
Bearish channel
This chart pattern is a variation of the previous channel, with the difference that this time the trend is downward. In this case, the parallel lines are known as:
- Upper straight line or line of resistance.
- Lower line or support line.
Between these two lines we can see how the price of the asset evolves. Generally staying in the range and always downward. Like the bullish pattern, a bearish pattern is considered to be formed when we can see that the price variation is maintained for at least two periods.
In addition to this, here are some tips for using this type of pattern:
- Do not open a long position (buy) when the asset price is in contact with the channel support. In this case, wait for the rebound at the resistance line and you will have better chances to get good returns.
- Like the bullish channel, use the “Parallel Lines” tool to draw a line that takes the candlestick wicks on the chart. This way you have the full range of the channel action and avoid false channel exits.
Flag
The flag chart pattern is a pattern that indicates a sharp upward or downward price movement on the asset. Among the characteristics of this type of pattern we can highlight:
- The timeframe of our chart may affect the display of this pattern.
- Its direction of exit depends on the movement that preceded it. This means that we can see this pattern form in both uptrends and downtrends.
- The target price of the pattern can be calculated by using the price and trend preceding the pattern as a basis.
Identifying this type of pattern is easier when the market has been in a sideways trend for some time. Since at these times, the price can react much more strongly to both the upside and the downside.. In the image shown above you can see how the price preceding the flag pattern remains in a range. Then within the parallel lines it holds on average with a slight rise, then breaks to the upside. In this case, the flag is bullish, but remember, it can also be bearish and can have its own particularities.
Cup with Handle
The cup-with-handle chart pattern is another basic continuation pattern that is often seen quite a bit on market charts. It gets its name because it looks like a coffee cup with a handle. To identify this pattern it is important to consider the following criteria:
- The first valley (the cup) is a deep and long-lasting valley, compared to the second valley (the loop).
- The target is a straight horizontal line joining the highs of the two valleys.
- The pattern is considered formed if:
- There is an important bullish precedent in the second valley,
- The first valley (the cup) has a point below 50% of the upward movement that preceded the pattern,
- The second valley (the handle) has a point below 50% of the height of the cup.
In this case, here is an example of this type of pattern seen with the Atani application.
In this case we can see how the two valleys are formed, the first one (cup) being deeper than the second one (handle). Both valleys share the same maximum, which is seen with a straight horizontal line. And finally, we have a major uptrend that is greater than the low of the cup valley, thus confirming our cup with handle pattern.
Triangles
Triangles are another pattern often seen in market charts. There are basically two types: the ascending one marking an uptrend, and the descending one, marking a downtrend.
Identifying these triangles is very simple, and you must take into account the following:
- For the ascending triangle, the resistance line is in a bullish order following the price of the asset. While the support line is completely horizontal.
- For the descending triangle, the resistance line goes in a bearish order following the price of the asset. While the support line is completely horizontal.
- The pattern is confirmed if the price range is repeated three times within the triangle.
Triangles in any case can also be symmetrical, and in this case, the upper and lower price lines are symmetrical to a straight horizontal line where the aforementioned lines meet.
Change Chart Patterns
We talk about change chart pattern when we are facing a pattern that indicates a change of trend in the price of the asset. They are very important patterns that every trader must learn to identify. Especially to take advantage of them and make the best decisions regarding our trading strategy. Among this type of patterns, we can find:
Wedge
The wedge is one of the most basic chart patterns of change that exist. This pattern is classified into two types which are:
- Ascending, which is a bearish chart pattern, and which is formed by two converging bullish straight lines.
- Descending, which is a bullish chart pattern, and which is formed by two converging bearish lines.
In both cases, this pattern is confirmed when we can observe more than two oscillations within the range of the lines.
Pattern V
The chart pattern V, is a pattern that has two types:
- V-Soil, formed by a V-shaped valley in a clear and even extreme downtrend. This pattern sends a powerful message to the market: panic. It is the culprit of the big downturns in the markets, since a trader seeing how the price goes down and down, begins to feel the selling pressure, especially when his holdings are already in losses. Generally, the trend ends in recovery and the consolidation period for that recovery can be variable.
- V-top, formed by a V-ridge in which there is a strong and even extreme uptrend. It is a pattern that sends a clear message to the market: strong buying and even greed. However, you must be careful, because usually this pattern ends with a strong downtrend. This pattern is often referred to as “the money train” because it is an opportunity that, if well exploited, brings excellent profits to the trader.
A simple way to explain this pattern is with the rise of cryptos in late 2020 and 2021, which gives us a clear trend of this type, especially the entire V-top, as we see in this screenshot.
Of course, there are also variations of this type of pattern. For example, where the valley can form more than once (such as the double V-top or double V-floor, for example). In any case the behavior is the same, and it is important to be aware of this type of movement. Especially, when there is bad news or panic is evident in the markets.
Shoulder-Head-Shoulder (SHS)
Perhaps one of the patterns most pursued by traders. And for good reason: if you see it, it is good to prepare for a decline. A decline that may or may not be extreme. This type of pattern is formed by indecision in the markets. Or, by the fact, that the price reaches a point, where investors are happy with their profits and sell. They can also form when entering at certain market dates or periods.
For example, if Bitcoin miners need to upgrade their equipment (usually at least one episode a year), then you will see this pattern very frequently during that time. This is because miners sell their BTC and flood the market. This creates a period of upside followed by other investors looking to make more profit on their investment (forming the head). And, finally the fall in price due to market flooding (forming the shoulder and subsequent fall). Of course, the HCH can appear due to other factors. That is where a good trader stays informed and active by checking the market and its liquidity.
In case you see the inverted SHS pattern, as a trader you can prepare yourself for the opposite effect of the SHS. This pattern is considered a bullish pattern. However, don’t cry victory. This pattern usually does not consolidate so you should keep an eye on the price of the asset. And, you should keep stop loss orders fine-tuned too.
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