In stock technical analysis, price patterns signal transitions between falling and rising trends. A price pattern is a movement that’s identified with curves and trend lines. When a pattern indicates a change in direction, it’s called a reversal. When a trend pauses and continues in the same direction, it’s known as a continuation.

Stock analysts use price patterns to evaluate current market movements and predict future developments. The following patterns are the most common and recognizable patterns to look for when using the software found at us.tradezero.co, which makes it easier to trade forex, shares, and in other markets.

Ascending Triangles

An ascending triangle is a continuation pattern that indicates the likelihood of a breakout where the triangle’s lines converge. To create such a pattern, a trader or analyst must place a horizontal line on resistance points and draw an uptrend or ascending line along support points.

Descending Triangles

Unlike an ascending triangle, a descending triangle is often found in down-trending bear markets. Support lines are horizontal and resistance lines descend, indicating the likelihood of a downturned breakout.

Symmetrical Triangles

For a symmetrical triangle, trend lines meet to indicate that a breakout could go in either direction. Support lines are drawn with upward trends, and resistance lines trend downward. Though the breakout could go either way, it will typically follow the market’s general trends.

Pennants

A pennant is drawn with dual trend lines that converge at some point. One of the most notable characteristics of a pennant is that its trend lines move in opposite directions. In many cases, volume decreases during pennant formation, followed by increases when a price breakout occurs.

Flags

Flags are built with parallel trend lines that move sideways, up, or down. Generally, flags with an upward trend appear as pauses in down-trending markets, while flags with downward movement show breaks in an up-trending market. Flag formation is often accompanied by periods of diminishing volume, which recovers with a price breakout.

Wedges

A wedge is like a pennant in that it’s drawn with converging trend lines. However, wedges are different because both trend lines move in the same direction. A downward-angled wedge shows a pause during an up market while an upward-angled wedge shows an interruption in a declining market. As with flags and pennants, volume will taper off during pattern formation, but it will increase with a breakout.

Cup and Handles

The cup and handles is a bull-market continuation pattern where an up trend pauses, but will continue with pattern confirmation. The cup part should look like the letter U rather than a V, and the handle will appear on the cup’s right side, resembling a pennant or flag pattern. When the handle has been completed, the stock may reach a new high and continue its upward movement.

Reversal Patterns

When a price pattern indicates a trend change, it’s referred to as a reversal pattern. Such patterns show that a bull or bear market is running out of momentum. An established trend will be interrupted before changing direction as the market becomes more bullish or bearish.

A reversal happening at the top of the market is called a distribution pattern, where shares and other instruments are sold more frequently than they’re bought. Conversely, a reversal happening at the bottom of a market is known as an accumulation pattern, where shares are bought with greater frequency. As with a continuation pattern, the longer things take to develop and the more substantial the price fluctuation, the larger the movement will be once a breakout occurs.

Head and Shoulders

A head and shoulders pattern may appear at the top or bottom of a market. It comes as a three-push series: an initial valley or peak, followed by a larger one, and then a final push that resembles the first. An up trend that’s interrupted by such a pattern may experience a reversal that brings a down trend.

Similarly, a down trend that creates a head and shoulders pattern at the bottom will probably reverse direction and move upward. A slightly sloped or horizontal trend line may be drawn to connect the valleys and peaks found in the pattern. Volume might decline during pattern development and rebound once a breakout occurs in either direction.

Double Tops

A double top or bottom signals an area where two unsuccessful breakout attempts have occurred. With a double top, which resembles the letter M, the push up toward the resistance level is shortly followed by another failed attempt that results in a reversal.

On the other hand, a double bottom resembles the letter W and comes when price tries to break through, is blocked, and fails the second time around. This may also result in a reversal. Triple bottoms and tops are less common, but they work similarly and can be a potent indicator of a trend reversal. These patterns are formed when prices test the same resistance or support level three times and cannot break through.

Gaps

A gap comes when a substantial price increase or decrease brings an empty space between trading periods. There are three kinds of gaps: breakaways, runaways, and exhaustion gaps. A breakaway gap occurs at the beginning of a trend, a runaway comes in the middle, and an exhaustion gap comes near the trend’s end.

Bilateral Patterns

Some experts divide chart patterns into another category: the bilateral pattern. As the name implies, prices can move in either direction. Though these patterns may not make much sense to a beginner, they’re great for traders who want to hedge their bets by placing orders at the bottom and the top. When either order is triggered, the other is automatically canceled. Bilateral patterns are best thought of as an indicator of the market’s volatility.

Price Channel Patterns

Used in technical analysis trading, price channels are continuation patterns where prices bounce between support and resistance lines. These lines are often horizontal but may run upward or downward as the market indicates. A great thing about this pattern is that it works well for day and long-term traders.

In Closing

Because trading history typically repeats itself, analysts have devised numerous pattern recognition techniques to increase their chances of success. However, it’s important to remember that none of these patterns are foolproof. Technical analysis in trading requires great attention to detail, but the potential rewards make it all worthwhile.