Some things in the market just seem timeless, like these seven classic chart patterns.
I know a lot of new traders who just don’t spend time on charts though. So here’s the deal…
If you ever wonder what other traders are thinking…
If you want to better understand what might happen next in the market — like what traders might do next and whether you should take a trade…
Or if you want a simple and effective way of finding amazing trades — one that savvy traders have been using for years…
You MUST learn how to read and analyze chart patterns.
Today, we’ll look at some chart patterns that smart traders use all the time, with examples of each classic pattern.
Chart patterns are just one aspect of trading we look at each day with the StocksToTrade Pro community. Ready to step up your trading skills? Join us at StocksToTrade Pro today.
Now, let’s dig into those chart patterns!
Table of Contents
- 1 What Is a Chart Pattern?
- 2 7 Classic Chart Patterns You Should Know
- 3 Use StocksToTrade to Help You Trade Chart Patterns
- 4 Conclusion
- 5 One Platform. One System. Every Tool
What Is a Chart Pattern?
When you break it down to basics, markets do one of three things: trend upward, trend downward, or consolidate in a trading range.
When a market trends upward, prices rise higher through a sequence of swings — with higher highs and higher lows. When a market is in a downward trend, prices move lower. They swing through lower highs and lower lows.
And what happens when a market is consolidating in a trading range? Here’s where we’ll see prices generally bounce around with no clear direction.
No matter which phase or trend a market’s in, price action generally shows repeating patterns of movement on the chart.
That’s what we call chart patterns. And savvy traders look to them to gain more insight before they make a trade. These patterns can give traders an idea of what the market will do next or key levels for price reversals.
Chart patterns can also help traders intelligently place entries, exits, stop-loss orders, and more.
The Two Types of Chart Patterns: Reversal vs. Continuation
It’s important to note that charts generally fall into one of two distinct patterns types: reversal patterns and continuation patterns.
Reversal patterns are found at the end of a trend when the market’s about to change direction. For example, after a long uptrend in price, the market can wear out and start on a downtrend in price.
Traders often use reversal patterns to spot early on when the market’s changing direction.
Continuation patterns signal that prices will continue the current trend.
In uptrends, the price often moves up, takes a breather, and pulls back a little. Then it regains its drive and continues in the broader trend up.
So traders often use continuation patterns to enter into a trade in the direction of a trend or add to a current winning position.
Why Should Traders Use Chart Patterns?
Traders have studied price-chart patterns for hundreds of years, and a collection of distinct patterns play out again and again.
Why? Largely because the markets are driven by human emotions. And human nature really never changes.
Traders tend to follow patterns: greedy at certain times and fearful at others. They generally respond in similar ways, no matter if a market’s breaking out of a price level or trading within a range.
That’s precisely why chart patterns are key: they can give you insight into the underlying psychology of the overall market. Market movements are largely driven by how traders react to what’s currently happening.
Once you understand these actions and reactions, that insight can help you better know what traders will do next. And that can help you decide whether you should be long, short, or completely out of the market.
7 Classic Chart Patterns You Should Know
There are hundreds of popular chart patterns … And depending on how watchful you are, you can often discover new ones for yourself. That said, not all chart patterns are equal.
There are a handful of chart patterns that commonly repeat in charts, and many traders constantly look for them. These are the classics. These chart patterns can signal a trend reversal or if a strong trend is still strong.
Below are the seven most important chart patterns that I think every newbie trader should know.
Get to know these seven key patterns. Look for past examples of them. Study them so you can easily spot them when they occur. Get more comfortable talking charts with other traders.
(Psst … Need a trading network? Check out our outstanding trading community, StocksToTrade Pro. You can learn through mentorship, live trading, chat rooms — all with other traders just like you. Sign up today!)
Once you better learn these classic patterns, you’ll have a better framework for understanding common price action. And depending on how much you study, you may be able to find some stellar trades…
Here are 7 classic chart patterns you need to know…
#1 The Cup and Handle
The cup and handle pattern is extremely popular with traders of small-cap and penny stocks. It can be an early signal of a huge price gain.
What’s with the name? When you look at the cup and handle pattern, it looks like a teacup.
These patterns often occur in long-term downtrends. We see price move upward and make an initial high, before falling back, basing, and eventually moving higher.
The rounded bottom is referred to as the cup. It often indicates that downward momentum has changed and that traders are buying the stock at low prices.
After the price moves back up, we get to the part of the pattern that’s called the handle. The handle is where we see a small pullback. The price moves downward, before quickly moving back up and testing the upper resistance level.
Traders often purchase the stock as it breaks out of the upper resistance level of the cup and handle.
#2 The Double Top
A double top is a basic but powerful reversal pattern. We see this pattern when an uptrending market tests a level, pulls back, then tests that level again. But it fails to break through and the price falls back down.
Note that the two swing highs are around the same price — that’s why we call it a double top. The double top pattern shows that the market doesn’t have enough bullish momentum to break through the key resistance level.
When you see this pattern, you can anticipate that the uptrend is over — at least temporarily. And you should expect the price to either trade in a range or begin a downtrend.
#3 The Supernova
The supernova is arguably the favorite and most anticipated chart pattern among penny stock traders.
That’s because the pattern plays out a lot in penny stocks…
Why? Well, that’s largely due to the fact that these stocks don’t need much buying power to get a sky-high boost. These kinds of moves happen far less often in larger-cap stocks and other markets such as forex and commodities.
The supernova pattern often happens when a stock is hyped. You may see that happen on social media or in a newsletter recommendation. And the hype may be based on nothing or on some major news catalyst.
Traders then pile into the thinly traded stock … That’s enough to push the stock price sky-high. But most of these stocks are running on pure hype with nothing substantial behind it. And as traders begin to realize that, they lose excitement. They want out of the stock. So they start selling, causing a rapid price drop.
Traders who can spot the supernova early on can ride a quick price rise … But don’t get greedy. Be ready to exit your position as price tops out.
And if you’re really smart, you can short the stock and profit as it declines. That’s a tricky play that requires some serious research and market knowledge.
But two fast-moving trades in both directions … that’s why so many penny stock traders love this pattern.
#4 The Head and Shoulders
The head and shoulders pattern might be the most well-known chart pattern. Even traders and investors who never use charts often know this name and understand how the pattern works…
The head and shoulders pattern looks exactly as the name suggests….
There’s a small price movement upward, then a pullback. Then there’s a large price movement upward before the price pulls back. And then there’s another small movement up like the first one … The two smaller swings are the shoulders, the big swing in the middle is the head.
The head and shoulders pattern is known as a major reversal pattern. It can indicate that the market will likely end its uptrend and the price will soon head lower.
Traders will often look for the price to drop below the level of the two swing lows, also known as the neckline. That’s when traders may close long positions or possibly enter into short-sell positions.
#5 The Triangle
Triangles are a common chart pattern where the stock price makes numerous swings — smaller and smaller each time. And if you connect lines through these swings, they create a triangle shape.
Triangles are generally continuation patterns and indicate that the market’s taking a breather from the previous trend, before continuing in the original direction.
Triangle chart patterns come in three distinct types:
- The symmetrical triangle: here the top triangle line slopes downward, and the bottom triangle line slopes upward. Traders often view this as a pause in the market momentum before it likely continues.
- The ascending triangle is where the lower line is rising, but the top line is horizontal. It’s another pause in the market momentum, but there’s still more buying power than selling — a bullish sign.
- The descending triangle is where the upper line slopes downward, but the lower line is horizontal. This shows that the sellers are more in control. This type of triangle is a continuation pattern found in downtrends.
Triangles are one of the simplest chart patterns beginners can recognize. If you’re just starting out, this may be a key pattern to watch for.
#6 The Flag
The flag is another common and simple continuation pattern found on charts of all time frames.
Flag patterns can be either bullish or bearish, depending on whether you find them in an uptrend or downtrend.
A bullish flag is characterized by a strong upward move in price … Then the market relents and the price pulls back, making a number of small up and down moves along the way. Traders generally see this as a temporary pause of momentum and expect the original trend to soon resume.
On the other hand, a bearish flag is essentially the opposite. The price will make a sharp downward move, then pull back in a few smaller swings before continuing the overall downtrend.
To draw a flag pattern, you draw a line through each swing high and each swing low. If properly drawn, they give the image of a flag on a flagpole. This is another great chart pattern for beginners.
#7 The Spring
This pattern isn’t as well-known in trading literature, but it’s a favorite of many professional traders. The famous chartist Richard Wyckoff discovered and popularized this pattern over 100 years ago.
The pattern has a number of names —spring, 2B, pump fake, or fake-out…
The pattern is characterized by a key high or low point in price, then the market pulls away. Then it retests, slightly pushing through that previous key high or low before the price falls away again.
It’s similar to a double-top or double-bottom. But instead, the spring penetrates the original level, which causes breakout traders to enter and hit the stop-loss point of other traders using the original high or low as a stop.
Spring patterns are very common and can occur in all time frames. They show the trader that the market didn’t have enough power to push through a level, and that the market will probably reverse, at least in the short term.
Context is key with the spring pattern … It’s smart to consider if the pattern happens at a key level or if it’s on a pullback and indicates the trend may resume, and not just randomly off a non-key price level.
Use StocksToTrade to Help You Trade Chart Patterns
Chart patterns, technical indicators, news catalysts, Level 2 price action … There are countless ways that savvy traders can find the best trades.
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In the hands of a skilled trader, chart patterns can be one of the most powerful tools for finding amazing trades and understanding the overall market mindset.
It’s no wonder that traders have used charts for hundreds of years and continue to do so today. If you understand how they work, they can better help you with your research.
You can go crazy trying to learn every chart pattern out there, and there are easily hundreds of them.
But you don’t need to learn them all … you just need to find what works best for you and your strategy.
If you’re starting out, stick with the classic chart patterns in this post for a while. Get comfortable spotting them on the chart. Eventually, they’ll pop out. But you gotta study and practice.
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What are your favorite classic patterns to trade? Share your thoughts in the comments below!