Get to Know Price Pattern: 10 Trading Patterns Every Trader Must Know

Price Pattern or chart pattern is a technical analysis tool that helps traders forecast price movements. Based on the assumption that past price patterns will repeat multiple times, it allows both novice and experienced investors to apply it effectively.

Basic Concepts of Price Pattern and How It Works

What is a Price Pattern? In reality, it is a form of asset price movement that indicates the battle between (Demand) and (Supply) forces.

When traders understand how to read Price Patterns correctly, they can better predict future price trends. This is because each pattern reflects the balance between buyers and sellers at different times.

Classification of Price Patterns: 3 Main Categories

There are many types of Price Patterns in trading textbooks, but for simplicity, they can be divided into three main groups:

First Group: Reversal Chart Patterns(

These patterns appear when the current trend is about to end and prepare to reverse direction. They are often found at the peaks or troughs of the price cycle.

For example, Double Top occurs at the end of an uptrend before reversing to a downtrend, while Double Bottom appears at the end of a downtrend before forming an uptrend.

) Second Group: Continuation Chart Patterns###

This type indicates a pause in the trend, where the price temporarily consolidates to gather strength. Afterward, the original trend continues in the same direction.

Examples include Flags and Pennants, which show a consolidation phase allowing buying or selling pressure to build.

( Third Group: Bilateral Chart Patterns)

This group occurs when buying and selling forces are in equilibrium, making it unclear which direction the price will move. Traders must wait until one side shows stronger momentum.

An example is the Symmetrical Triangle, where highs and lows converge into a triangle shape.

10 Price Patterns Traders Should Study

1. Head and Shoulders (Head and Shoulders)

This pattern appears at the end of an uptrend, characterized by three peaks: the left shoulder, head, and right shoulder. When the price breaks below the Neckline, it signals a trend reversal to a downtrend.

Price target is measured by the distance from the head’s peak to the neckline, then projecting the same distance downward from the breakout point.

2. Double Top (Double Top)

A reversal pattern formed by two nearly equal peaks. When the price breaks below the level between the two peaks, it indicates a downward move has begun.

3. Double Bottom (Double Bottom)

The opposite of Double Top, appearing at the end of a downtrend with two lows. When the price rises and breaks above the high between the lows, it signals a trend reversal to the upside.

4. Rounding Bottom (Rounding Bottom)

This pattern features a gradual decline to a low point followed by a smooth, rounded rise, resembling a circular arc. It indicates a gentle reversal from a downtrend to an uptrend.

5. Cup and Handle (Cup and Handle)

Consists of two parts: a rounded bottom resembling a cup, followed by a consolidation phase similar to a handle, then a breakout upward.

6. Wedges (Wedges)

Wedge patterns form within narrowing price ranges and are divided into two types:

• Rising Wedge appears at the end of an uptrend, with rising prices within a narrowing range, signaling a reversal to a downtrend.
• Falling Wedge appears at the end of a downtrend, with falling prices within a narrowing range, signaling a reversal to an uptrend.

7. Flags and Pennants (Flags and Pennants)

Both are short-term consolidation patterns. Flags look like rectangles, while Pennants resemble triangles. When a breakout occurs, the trend continues in the same direction.

8. Ascending Triangle (Ascending Triangle)

This pattern occurs in an uptrend, characterized by higher lows while highs remain flat. A breakout above the resistance level confirms the continuation of the uptrend.

9. Descending Triangle (Descending Triangle)

The opposite of the Ascending Triangle, forming in a downtrend with lower highs and flat lows. A breakout below the support level indicates a continuation of the downtrend.

10. Symmetrical Triangle (Symmetrical Triangle)

This pattern occurs when buying and selling forces are balanced, with highs and lows converging into a triangle. A breakout in either direction confirms the new trend.

Important Cautions When Using Price Patterns

Interpreting Price Patterns involves subjectivity; two traders observing the same pattern may draw different conclusions.

Issues to be aware of:

• Short-term timeframe Price Patterns are highly susceptible to market noise and may not reflect true trends.
• Patterns formed with low trading volume may be unreliable; volume confirmation is essential.
• Relying solely on Price Patterns can lead to inaccurate signals. Experienced traders often combine them with other tools, such as technical indicators, to improve accuracy.

Summary

Price Pattern is a fundamental and effective tool for trend analysis. Both novice and experienced traders can utilize it. Success depends on continuous practice and observation. Combining other analytical tools can significantly enhance the reliability of signals.