Never underestimate the power of stock chart patterns. Learning them can be key to finding your way in the market. That’s why I often say to read the charts until your eyes bleed.
OK, maybe that’s a slight exaggeration … But too many new traders don’t spend time learning how to understand stock chart patterns. So here’s the deal…
If you wonder what other traders are thinking…
And if you want to better understand what might happen next in the market…
You MUST learn how to read stock chart patterns.
Let’s look at some popular stock chart patterns, how to spot them, and what to do with them.
Table of Contents
- 1 What Is a Stock Chart Pattern?
- 2 Why Stock Chart Patterns Are Important
- 3 Why Should Traders Use Stock Patterns?
- 4 12 Classic Chart Patterns Every Trader Should Know
- 5 How to Learn Stock Patterns
- 6 Frequently Asked Questions About Stock Chart Patterns
- 7 Use StocksToTrade to Help You Trade Chart Patterns
- 8 Conclusion
- 9 One Platform. One System. Every Tool
What Is a Stock Chart Pattern?
Markets do one of three things — trend upward, trend downward, or consolidate.
When a market trends upward, prices rise higher through a sequence of swings. The price makes higher highs and higher lows. When a market’s in a downward trend, prices swing lower. They make lower highs and lower lows.
When a market is consolidating in a trading range, we see prices move between key levels — support and resistance.
Whatever the stock’s doing, certain patterns tend to form.
We call these chart patterns. Traders use them to gain insight when making a trade. Patterns give traders an idea of what the market might do next. They also show us key levels.
Chart patterns can help you find good places to enter or exit a trade. Learning how to understand stock chart patterns can help you make a trading plan.
At StocksToTrade, we have an algorithmic program that uses Oracle to help identify key levels for traders just like you. Find out how Oracle’s Daily Alerts can enhance your learning!
Why Stock Chart Patterns Are Important
Day traders rely on technical analysis when looking for trades. Position traders do the same, but with a longer view in mind.
Patterns tell us what moves might happen. If you’re looking to take a trade, you want to know where the support and resistance are. You’re looking for key levels where other traders might buy or sell.
Chart patterns can help you with that.
If you’re oblivious to patterns, you’re trading at a disadvantage. You might as well be trading with your eyes closed.
The Three Types of Chart Patterns: Breakout, Continuation, and Reversal
Charts fall into one of three pattern types — breakout, reversal, and continuation.
Breakout patterns occur when a stock has been trading in a range. The top of the range is resistance, and the bottom is support.
If the stock breaks through either end of this range, it’s a breakout. When it breaks above resistance, we call it a breakout. If it breaks below support, we call that a breakdown.
Reversal patterns happen 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 a downtrend.
Traders often use reversal patterns to spot when the market’s changing direction.
Continuation patterns signal that prices will continue the current trend. Stocks don’t go straight up or straight down. Sometimes a trend will stall before continuing in the direction it was going.
Traders use continuation patterns to enter into a trade or add to a current winning position.
Why Should Traders Use Stock Patterns?
Traders have studied chart patterns for hundreds of years. A collection of distinct patterns play out again and again.
Why? Because human emotions drive the markets. And human nature rarely changes.
Traders also tend to follow patterns. They respond in consistent ways when situations are similar.
That’s why chart patterns are key. They can give you insight into the underlying psychology of the market.
Understanding traders’ actions and reactions can provide insight into what might happen next. That can help you decide whether you should be long, short, or flat.
On the SteadyTrade podcast, we often talk about tracking and trading patterns. We go over Stephen Johnson’s incredible journey in this episode. And we interview experts on a variety of market-related topics. Check it out!
12 Classic Chart Patterns Every Trader Should Know
There are hundreds of stock chart patterns. But not all chart patterns are equal.
There’s a handful of stock chart patterns that traders always look for. These are the classics. Get to know these 12 key patterns. Look for examples of them and save them somewhere you can easily access them. Go back and study them so you can spot them as they’re forming.
Once you learn how to study stock charts in a technical way, you’ll have a better understanding of price action. We call this technical analysis.
Here are the 12 classic chart patterns you need to know.
#1: The Cup and Handle
The cup and handle pattern is a popular breakout pattern.
The price comes up and sets a high. It then falls back and sets a base. It comes back to the first high and pulls back again, but not to the original base. It rebounds off a higher low and breaks out.
The rounded bottom is the cup. That’s the first base. The handle is where we see the higher low.
#2: The Rounding Bottom
The rounding bottom signals a reversal and can lead to a breakout.
This looks the way it sounds. The stock comes up to a resistance level, Then pulls back.
It softly downtrends to support before forming a gentle uptrend. If it helps, you could picture a bowl.
This is also called an ABCD pattern.
The example below is from Adial Pharmaceuticals, Inc. (NASDAQ: ADIL.) Matt Monaco called this out in Small Cap Rockets as it was happening. (Past performance is not indicative of future results.) The right team and the right tools can help you study these plays in real-time.
#3: 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. It fails to break through, and the price falls back down.
The two highs are around the same price — that’s why we call it a double top. The double top pattern happens when the market doesn’t have enough bullish momentum.
This pattern can signal the end of an uptrend — at least for the time being. You can expect the price to either trade in a range or begin a downtrend.
#4: Double Bottom
Double bottoms fall into the reversal category.
As the name implies, this is a pattern with two bottoms. The price falls and comes back up. Later, it tests the bottom again. But it finds support and moves back up. Two bottoms.
Keep an eye on the place where it bottomed twice. That’s now a key level.
#5: The Supernova
The supernova is a favorite among penny stock traders.
Why? Well, small-cap stocks don’t need much buying power to run. These kinds of moves are less common in large-cap stocks.
The supernova often happens when a stock gets hyped up. That hype could come from major news catalysts, rumors, or the breakout itself.
Traders who can spot the supernova early on can ride a quick price rise. But don’t get greedy.
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#6: The Head and Shoulders
The head and shoulders pattern is a well-known reversal pattern. It indicates the stock will end its uptrend and head lower.
The head and shoulders pattern looks like the name suggests.
There’s a small price movement upward, then a pullback. Then the price moves above the original resistance before pulling back. Finally, there’s another move upward that stops at the first resistance line.
The two smaller swings are the shoulders, and the big swing in the middle is the head.
Traders often look for the price to drop below the level of the two lows. That’s when traders may close long positions or take short positions.
#7: The Triangle
Triangles are a common stock chart pattern. The price makes swings that get smaller each time. If you connect lines along the tops and bottoms, they form a triangle.
Triangles are a versatile pattern. Sometimes they precede reversals and continuations, but there are triangle breakout patterns.
Triangle chart patterns come in three distinct types:
- The symmetrical triangle. The top and bottom trend lines are equal distances from the midpoint. Traders often view this as a pause in the market’s momentum before it continues.
- The ascending triangle. The lower trend line is rising, but the top line is horizontal. This can be a breakout pattern, a continuation pattern, or a reversal pattern.
- The descending triangle. The upper trend line slopes down, but the bottom line is horizontal. 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 starting out, this is a key pattern to watch for.
#8: The Wedge
The wedge is a kind of triangle. It can signal a breakout or continuation.
A wedge can be an upward or downward wedge. It starts with wide price action that gets tighter. But this action has a clear direction.
Higher lows and higher highs create a bullish wedge. Lower highs and lower lows create a bearish wedge. The top or bottom lines are not as steep as the support or resistance lines.
Imagine an ascending or descending triangle, but the horizontal line is on a slope.
#9: The Flag
The flag is another common continuation pattern. Flags can be bullish or bearish.
A bull flag starts with a strong upward move in price. Then buyers relent and the price pulls back, making small up and down moves along the way. Traders see this as a pause in momentum and expect the original trend to soon resume.
A bear flag is just the opposite.
To draw a flag pattern, put a line along each swing high and each swing low. This is another great chart pattern for beginners.
#10: The Pennant
Pennants signal continuation.
As with a bull or bear flag, the price shoots in one direction. This creates a pole. Then the price action pulls back and begins to move up and down. It gets tighter toward the point.
If you draw a line across the top and the bottom, you wind up with a long, symmetrical triangle.
#11: The Spring
This reversal stock chart pattern isn’t as well known, but it’s a favorite of many pro traders.
The pattern has a few names — spring, stop-hunt, 2B, pump fake, and fake-out among them.
The market sets a key high or low point, then pulls away. Later, it retests. It flicks through the key high or low before the price falls away again.
It’s like a double-top or double-bottom. But instead, the spring penetrates the original level.
When a stock opens above or below its closing price, it creates a gap in the chart. Usually, this results from extended-hours trading. Sometimes trading halts can cause gaps intraday.
While not a pattern per se, this is a common occurrence in the market. A stock can gap above or below a key level. That would be a breakout.
It can also gap in the opposite direction of a trend, signaling a reversal.
How to Learn Stock Patterns
Want to know how to learn stock patterns? It’s the same way you get to Carnegie Hall. Practice, practice, practice.
There’s no shortcut. You have to put in screen time.
Review old charts. Look for the patterns I’ve shared here. Pick one or two patterns at a time and get to know them.
I talk about the hottest stocks every day in my Pre-Market Prep sessions. I go live every day at 8:30 a.m. Eastern time. Come find out what stocks are moving. Watch them for the patterns you’ve been studying.
How to Read Stock Chart Patterns
You want to find key levels. See how the price behaves around those key levels. Some key levels to think about include:
- High and low of the day
- 52-week highs and lows
- Previous close
- Premarket highs
It’s going to take practice and screen time. The more you see it, the better you’ll be able to see it when it’s happening.
Frequently Asked Questions About Stock Chart Patterns
Do Chart Patterns Work?
No pattern works 100% of the time. And no pattern will play out exactly the same every time. To learn them, you need practice. Lots of practice. On the SteadyTrade team, we have a checklist we look at before we take a trade. Come be part of the SteadyTrade Team! We’d love to have you.
How Many Stock Chart Patterns Are There?
There are three types of patterns — breakouts, reversals, and continuations. Within those three types of patterns, there are hundreds of possibilities.
You don’t have to know them all. Only a handful are common knowledge. As a new trader, those are the ones you want to focus on.
How Do You Predict if a Stock Will Go Up or Down?
Look for bullish patterns and bearish patterns. If a pattern is bullish, it’s more likely to go up. The opposite holds true for bearish patterns.
You won’t be right every time. You can predict that a stock will do something based on its history. Remember you can predict, but you never know for sure what will happen. Be ready to cut losses if you’re wrong.
What Patterns Do Day Traders Look For?
I always check the daily chart first. I look for stocks that have run in the past. How did it behave the last time it ran? How did it do the next day?
I check the daily chart for the patterns mentioned above. Is it at a key level? Is it breaking out?
My favorite patterns — you could also think of them as setups — are the dip and rip and the VWAP-hold high-of-day break. They don’t fall under the common pattern category, but they’re effective and easy to learn.
You’ve got to keep it simple.
Use StocksToTrade to Help You Trade Chart Patterns
Chart patterns, technical indicators, news catalysts — there are countless ways traders look for the trades.
The markets are more competitive than ever, so you have to enter the battle with the right tools. That’s something we thought about when building the StocksToTrade platform. It’s the all-in-one trading solution made by traders for traders.
I could list every feature, but you should see it for yourself. Get your 14-day trial of StocksToTrade for just $7 today!
Stock chart patterns can be powerful tools. They can help you understand the market mindset and find amazing trades.
Traders have used charts for hundreds of years and continue to do so. If you know how they work, they can help you build trade plans.
You don’t need to learn them all. All you need to find out is what works best for you.
If you’re starting out, stick with these classic chart patterns for a while. Get comfortable spotting them on the chart. Before you know it, they’ll pop out. But you gotta study and practice.
Why go it alone? Join the SteadyTrade Team. I go live at least twice a day to answer questions and help find the best trades. I’d love to have you!
What are your favorite classic stock chart patterns to trade? Share your thoughts in the comments!