Today we’re going to explore sixteen of the most popular technical charting patterns and price action candles that we observe on all timeframes and in all different trading markets. Many technical-based traders make a living exclusively by trading from charts by observing patterns and price action. I have developed the following resource for you to brush up on your technical chart pattern and price action knowledge!
Throughout this post, I am going to cover what each chart pattern looks like (with a provided example), whether each pattern is usually bullish, bearish, or neutral (and how this might affect your trading bias when you see them forming). I’m going to explain the importance of trading volume within each pattern, and where we should anticipate it increasing and decreasing. Finally, I will offer logical places to enter positions and set your stop-losses when trading based on each of these patterns.
It is important to note that no chart pattern has a 100% rate of success. As is the case with all of the following charting patterns, or any trading strategy for that matter, there is no guarantee that we are ever going to experience a winning trade. What these chart patterns offer us are scenarios in which we have the odds in our favor, and we have a higher probability of one outcome occurring over another. When we have the probabilities in our favor, and we act with consistency, we can expect to profit over a series of many trades. Even though these patterns generally offer us an idea of whether to expect price to move higher, or lower, we need to be flexible and ready to make trading decisions, based on the resulting price action as opposed to what we think should happen.
As the name suggests, the ascending triangle looks like a triangle, with a horizontal resistance level, and an ascending line of support. Ascending triangles are generally a bullish continuation chart pattern, which means we anticipate long entry trading opportunities, with a higher probability, than we do short. When anticipating going long based on an ascending triangle chart pattern, we want to see an increase of trading volume immediately before and during the anticipated breakout through the horizontal resistance level. Without this volume behavior, we will have a far lower rate of success from trading this pattern. We shall anticipate a breakout event to occur, as the support and resistance lines converge. It is important to understand that the breakout can occur before price reaches the apex of the triangle, as has happened in the provided example. The way that we trade an ascending triangle pattern is to enter a long position as price breaks out above the resistance level with a stop-loss set below the level of resistance (or more conservatively, below the line of support).
A descending triangle is the inverse of the ascending triangle pattern. Descending triangles have a horizontal level of support with a descending line of resistance. The descending line of resistance squeezes price against the support level, generally resulting in a bearish continuation break-down move. This bearish break-down of price is confirmed by a sharp increase in trading volume as price breaks through the level of support. We enter a short position trade once this break-down is confirmed with a stop-loss back above the level of support (or more conservatively, above the line of resistance).
Symmetrical triangle patterns are a combination of both the ascending and descending triangles. They have a descending line of resistance and an ascending line of support. Symmetrical triangles are a neutral charting pattern with a fair chance of a breakout in either direction. As a general rule, the more common direction for the breakout to occur will be in the same direction as the general trend of the market. A quick tip for determining the current trend of the market is to examine the direction that the 200 period moving average (200SMA) is currently pointing. As is the case with all triangle patterns, we expect to see volume increase as price is squeezed into the apex of the triangle by the converging support and resistance lines, in anticipation of a breakout event. We trade a symmetrical triangle by going long or short, based on the direction of the resulting breakout. We place our stop-loss either below the resistance line (if we go long), or above the line of support (if we go short).
Bull flags are found on charts that have had a very sharp upward move in price, followed by a lower volume consolidation (with a slight pullback). The shape of this pattern represents a flag on a pole. The “flagpole” is formed by the sharp move higher in price and the “flag” is formed by the consolidation pattern (typically angled lower on the chart). Bull flags are a very bullish pattern (as the name suggests) and can offer excellent trading opportunities to go long. The volume traded plays a very significant role in this pattern. For it to be confirmed as a bull flag, we must see sharply increased volume for the “flagpole” part of the move, followed by significantly reduced volume during the consolidation. The way we trade a bull flag is by entering a long position as volume begins to pick up again and price breaks out of the consolidation range, anticipating a continuation move higher. Our stop-loss is generally placed below the lowest point of the consolidation pattern. Bull flags often will form in sequence, one after another, sometimes up to 4 (or more) times in a row, in markets that are trading on exceptionally high relative volume. It is important to note that each consecutive bull flag will have a lower probability of a successful resolution, and a higher chance of triggering your stop-loss. For this reason, I personally will only trade the first two bull flags to form in a sequence.
Bear flags are the inverse of bull flags – a sharp move lower is followed by a lighter volume consolidation rally. As the name suggests this is a bearish pattern, and when we see it we shall usually anticipate a continuation move lower. Just like a bull flag, we need to see significantly lower volume traded during the consolidation period of the pattern. We trade bear flags by entering a short position trade, when volume increases, and price breaks downward, past the bottom of the consolidation range. Our stop loss, when trading bear flags, shall be set above the highest point of the consolidation range, to ensure we do not get shaken out of our position unnecessarily.
Just like triangle patterns, wedges come in both ascending and descending configurations. Unlike triangle patterns, however, wedge patterns have no horizontal support or resistance lines. The support and resistance lines of a wedge pattern tend to run almost parallel (slightly converging), aiming either higher or lower on the chart. Wedge patterns will more often result in reversals of price. This means that once the pattern finishes consolidating, an ascending wedge will tend to break-down lower, and a descending wedge will tend to breakout higher. Similar to all of the patterns previously discussed, we look to see a sharp increase of volume as price breaks out either higher or lower from the wedge. The high-volume breakout move will confirm the directional bias of our trade entry. Our stop loss is set to be triggered if price re-enters the wedge consolidation, or more conservatively, set on the opposite side of the wedge consolidation pattern altogether.
Double Tops / Bottoms
Double tops and double bottoms are a sign that price was unable to break through a specific support or resistance level on two separate occasions and the result is usually a price move in the opposite direction. For this reason, double bottoms are a bullish chart pattern, and double tops are bearish. Double tops look like an “M” shape on the chart, whereas double bottoms look like a “W“. When identifying double tops and double bottoms, we want to see an increase of trading volume as price comes into, and is rejected by the support or resistance level. It may be easier to identify this volume behavior, on a lower time-frame chart. Double tops and double bottoms are reversal patterns, and we trade them accordingly. We look to either go long, after a double bottom pattern has formed, or, to go short, after the resolution of a double top. Our stop loss will be set on the other side of the nearest support or resistance level, depending on the directional bias of our trade.
Head and Shoulders / Inverted Head and Shoulders
Head and shoulders patterns often signal the end of a bullish price trend. To identify a head and shoulders pattern formation, we look for a high (the first shoulder), followed by a higher high (the head), followed by a lower high (the second shoulder) – as seen in the example provided. A head and shoulders pattern is a bearish chart pattern and is more likely to result in price moving lower with bearish momentum. The opposite of this is called an inverted head and shoulders pattern, which is a bullish pattern. It is identified in the same way as a regular head and shoulders pattern but in reverse. We enter either short, or long, based on whether we are trading off a head and shoulders or an inverted head and shoulders pattern, after the resolution of the pattern has been confirmed. This confirmation is given when the second shoulder has been formed and price is beginning to move away from this level. We look to enter a position as price passes through the neckline with a stop loss on the other side of the shoulder.
Not all technical chart patterns take a whole series of candles to resolve. There are price action patterns that can play out in as little as a single candle. As is the case with any charting pattern, price action candles should not be relied upon solely as signals to enter or exit a position. They should instead be combined with additional technical indicators and with support and resistance price levels, as part of a trading strategy. Here are a few examples of some of the most powerful price action candles to look out for:
A hammer candle can be identified by its short body and long lower wick. Whether red or green, a hammer candle is often a sign of bullish strength. A hammer candle tells us that although price did move lower during the course of the time period for which the candle represents, the lower prices were rejected and buyers pushed the price back up towards the higher prices that the candle opened at. Hammer candles are generally not a great trade entry signal on their own but can be very useful when combined with other technical indicators and variables for additional confirmation, such as areas of support and resistance, or a fast stochastic indicator.
Shooting Star Candle
Shooting star candles are the opposite of hammer candles. Whether green or red a shooting star is usually a bearish signal. Shooting star candles often signal the top of an uptrend, or the beginning of a pullback, in patterns such as the bull flag. Just like hammer candles, shooting stars can make for great short trade entries when they form immediately in front of a resistance level and when confirmed by other technical indicators.
Doji candles are unique because the price that they open and close at is the same (or just about the same). There are many different types of doji candles that you will encounter whilst trading. The wicks of the doji candle signal to us what we might expect to happen next. If there is a long wick on the bottom of the doji and the open and close are toward the highs, we treat it like we do a hammer candle. If there is a long wick on top of the doji and the open and close are towards the bottom, we treat it like a shooting star. If the doji has roughly equal length wicks on the top and bottom, this is a sign of indecision and we must wait for further confirmation before making any trading decision.
Bullish / Bearish Engulfing Pattern
A bullish engulfing pattern is identified as a green candle that completely engulfs the previous red candle. Bullish engulfing patterns are a strong bullish signal, they will look like hammer candles when viewed on a higher time-frame chart and are treated accordingly. Conversely, a bearish engulfing pattern is defined as a red candle that completely engulfs the previous green candle. As you can see in the provided example, the red candle has opened at the high of the green candle before it and closes significantly lower than the green candle opened. This is a strong bearish signal and is to be treated similarly to a shooting star candle.
I want to reiterate the importance of not making any trading decision based on specific price action or candlestick patterns alone. We must consider other factors such as support, resistance, and other technical indicators, before deciding whether we are going to enter or exit a trade. When implemented correctly, all of these patterns can be extremely useful pieces of a trading strategy. We must not forget the importance that volume plays in all of these technical patterns and must understand that without volume increasing and decreasing in the right places, the pattern is not complete. When trading, we must only enter on the highest quality of setups, where all of the variables suggest that we have a greater chance of experiencing a winning trade. These setups are identified by confluence between technical indicators, charting patterns, and price action.
If you would like further information or examples, check out our video and Cheat Sheet at the following links.
YouTube Video: https://youtu.be/Z9Yw-aRfzTw
Cheat Sheet: https://imgur.com/a/6GRQn3a