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Trading chart patterns

Investors trade assets by discovering setups and configurations within the scopes of trading chart patterns. Certain price action produces chart patterns which traders use to configure entries, stop losses, and take profit orders. Chart patterns are found in the forms of geometric shapes such as: triangles, wedges, pennants, flags, diamonds, etc.

Each pattern is made out of a series of trendlines and curves. They all follow the basis of support and resistance lines which you can use to determine how the pattern may play out. Patterns indicate reversals and continuations – A.K.A. whether the price will continue trending or reverse its direction.

Chart patterns either point down or up. Ascending formations are defined by higher highs and higher lows while descending formations are defined by lower highs and lower lows. However, each formation still possesses its own special meaning and trading style.

Triangle trading chart patterns

Triangles are patterns formed by two trendlines that close in and form a corner at the end. The price converges and contracts inside this structure until the asset decisively breaks outside it.

Triangles can be either signs of continuation or reversal depending on whether the pattern is validated.

There are two types of triangles: ascending and descending triangles.

Ascending & descending triangles trading chart patterns
Ascending & descending triangles patterns

Ascending triangles have a horizontal trendline at the top (resistance) and a diagonal trendline at the bottom (support). This triangle plays out with the price breaking above resistance.

Descending triangles have a diagonal trendline at the top and a horizontal support line. The price should break below the support line for pattern validation to occur.

Wedges

A wedge is a price formation defined by two converging trendlines – which mark the formation’s lows and highs. The formation is characterized by a fall in volume as price converges. It also signifies a reversal, which can be bullish or bearish.

Rising wedge
Rising wedge

Rising wedges indicate a bearish reversal while falling wedges indicate a bullish reversal. Since the price contracts to such a small level, you should place a stop loss the moment you spot the pattern because its distance from the final breakout will be large.

Pennants

The pennant is a continuation pattern defined by a sharp uptick in price followed by price consolidating inside a wider structure, after which it breaks above the formation.

Bullish pennant trading chart patterns
Bullish pennant

A pennant is made out of three components: a flag pole, pennant, and a breakout.

The formation starts with the flag pole, a sharp uptick in price defined by large swaths of volume. Next, the price enters a pennant and consolidates during a long period of time. For a clear validation, the price must break out of the pennant and continue the trend.

Flags

Flags represent patterns where price moves opposite of the trend on a short-term basis before continuing the trend set by higher time frames.

For example, Bitcoin can engage in a LTF bullish trend that ends with the price rejecting from a higher high. The price will then consolidate in a tight range while spiraling downwards only to break above and continue the original bullish trend. Such a flag is defined by four key traits:

Flag pattern
Flag pattern
  • a preceding bullish move
  • a consolidation price channel
  • surge in volume prior to break out
  • confirmation of breakout

Bearish flags mimic the same pattern, except that they are preceded by a bearish impulse. The price consolidates upwards in a tight channel before breaking below and continuing the original downward movement.

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You may also like this article about candlestick patterns.