11 Most Essential Stock Chart Patterns

Stock chart patterns are an important trading tool that should be utilised as part of
your technical analysis strategy. From beginners to professionals, chart patterns play
an integral part when looking for market trends and predicting movements. They can be
used to analyse all markets including forex, shares, commodities and more.
The following stock chart patterns are the most recognisable and common chart patterns
to look out for when using technical analysis to trade the financial markets. Our guide to
eleven of the most important stock chart trading patterns can be applied to most
financial markets and this could be a good way to start your technical analysis.

QUICK LINK TO CONTENT:

1. Ascending triangle
2. Descending triangle
3. Symmetrical triangle
4. Pennant
5. Flag
6. Wedge
7. Double bottom
8. Double top
9. Head and shoulders
10. Rounding top or bottom
11. Cup and handle
12. How to use this guide
13. How to easily recognise chart patterns
14. Stock pattern screener
15. Stock chart patterns app

1. Ascending triangle
The ascending triangle is a bullish ‘continuation’ chart pattern that signifies a breakout is
likely where the triangle lines converge. To draw this pattern, you need to place a
horizontal line (the resistance line) on the resistance points and draw an ascending line
(the uptrend line) along the support points.
2. Descending triangle
Unlike ascending triangles, the descending triangle represents a bearish market
downtrend. The support line is horizontal, and the resistance line is descending,
signifying the possibility of a downward breakout.

3. Symmetrical triangle
For symmetrical triangles, two trend lines start to meet which signifies a breakout in
either direction. The support line is drawn with an upward trend, and the resistance line is
drawn with a downward trend. Even though the breakout can happen in either direction, it
often follows the general trend of the market.

4. Pennant
Pennants are represented by two lines that meet at a set point. They are often formed after
strong upward or downward moves where traders pause and the price consolidates,
before the trend continues in the same direction.
5. Flag
The flag stock chart pattern is shaped as a sloping rectangle, where the support and
resistance lines run parallel until there is a breakout. The breakout is usually the opposite
direction of the trendlines, meaning this is a reversal pattern. Learn more about breakout
stock patterns.

6. Wedge
A wedge pattern represents a tightening price movement between the support and
resistance lines, this can be either a rising wedge or a falling wedge. Unlike the triangle,
the wedge doesn’t have a horizontal trend line and is characterised by either two upward
trend lines or two downward trend lines.
For a downward wedge, it is thought that the price will break through the resistance and
for an upward wedge, the price is hypothesised to break through the support. This means
the wedge is a reversal pattern as the breakout is opposite to the general trend.
7. Double bottom
A double bottom looks similar to the letter W and indicates when the price has made two
unsuccessful attempts at breaking through the support level. It is a reversal chart pattern
as it highlights a trend reversal. After unsuccessfully breaking through the support twice,
the market price shifts towards an uptrend.

8. Double top
Opposite to a double bottom, a double top looks much like the letter M. The trend enters
a reversal phase after failing to break through the resistance level twice. The trend then
follows back to the support threshold and starts a downward trend breaking through the
support line.
Read more about trading with double top and bottom patterns.

9. Head and shoulders

The head and shoulders pattern tries to predict a bull to bear market reversal.
Characterised by a large peak with two smaller peaks either side, all three levels fall back
to the same support level. The trend is then likely to breakout in a downward motion.

10. Rounding top or bottom

A rounding bottom or cup usually indicates a bullish upward trend, whereas a rounding
top usually indicates a bearish downward trend. Traders can buy at the middle of the U
shape, capitalising on the trend that follows as it breaks through the resistance levels.
 11. Cup and handle
The cup and handle is a well-known continuation stock chart pattern that signals a bullish
market trend. It is the same as the above rounding bottom, but features a handle after the
rounding bottom. The handle resembles a flag or pennant, and once completed, you can
see the market breakout in a bullish upwards trend.

How to use this guide

1. Learn these essential candlestick chart patterns.
2. Open a demo account and practice identifying and trading chart patterns.
3. Once confident in your chart pattern trading abilities, you may wish to upgrade to a
fully funded live account to profit from your new trading edge.

How to easily recognise chart patterns

Chart patterns can sometimes be quite difficult to identify on trading charts when you’re
a beginner and even when you’re a professional trader. Using popular patterns such as
triangles, wedges and channels, coupled with our bespoke star rating system, we have a
tool that updates every 15 minutes to continuously highlight potential emerging and
completed technical trade set-ups. You can also apply stock chart patterns manually on
your trading charts as part of our drawing tools collection.

Trading chart patterns often form shapes, which can help predetermine price action, such
as stock breakouts and reversals. Recognising chart patterns will help you gain a
competitive advantage in the market, and using them will increase the value of your
future technical analyses. Before starting your chart pattern analysis, it is important to
familiarise yourself with the different types of trading charts.

Stock pattern screener

Luckily, we have integrated our pattern recognition scanner as part of our innovative
Next Generation trading platform. Our pattern recognition scanner helps identify chart
patterns automatically, saving you time and effort. The pattern recognition software
collates data from over 120 of our most popular products and alerts you to potential
technical trading opportunities across multiple time intervals. Alternatively, see a list of
well-known and effective stock screeners here.

Stock chart patterns app

Our online trading platform is also available on mobile and tablet devices, thanks to
advancements in technology. Read more about our mobile trading applications and how
you can browse stock chart patterns through our app when trading on-the-go. This is
available for both Android and iOS software.
The 3 Most Common and Profitable Chart Patterns

At the beginning of best-selling book How to Make Money in Stocks, IBD Founder

and Chairman William J. O'Neil shows 100 charts of the top-performing stocks over
the last 100+ years. Whether it was General Motors in 1915, Coca-Cola in 1934 or
Priceline.com in 2006, they all built the same types of patterns.

You'll find those same shapes today and decades from now. And by learning to spot
these bases, you'll be able to get in early on the best stocks — year after year.

Start with the three most common patterns:

 Cups: Cup-with-Handle and Cup-without-Handle
 Double Bottom
 Flat Base

Cups: Cup-with-Handle
What to Look For in the Cup-with-Handle pattern.

1. Prior uptrend of at least 30%

To form a proper chart pattern, you have to have a prior uptrend. The idea
behind bases is that after making a decent run, the stock begins forming
stepping stones as it takes a breather and prepares for an even higher climb.

2. Base Depth: 15%-30%

The depth of the base — measured from the peak on the left side of the cup to
the lowest point of the cup — should be between 15% and 30%. In a severe
bear market, the depth may be 40% - 50%. As a general rule, look for stocks
that held up relatively well during the market correction. So if one stock on
your watch list dropped 35% while another's base depth is only 20%, all else
being equal, the stock with the 20% decline could be forming a stronger base.

3. Base length: At least 7 weeks

- The first down week in the base counts as Week #1.

 The minimum length for a cup with handle is 7 weeks, but some can last much
longer — several months or even a year or more. Be wary of any pattern that
has the shape of a cup with handle but is only, say, 5 weeks long. That's
typically not enough time for the stock to consolidate the prior gains, and such
bases have a higher chance of failing.

4. Handle:

- Volume in handle should be light — depth of the handle should be 10%-12%,

should form in upper half of base. Peak of handle should be within 15% of old
high on left side of cup.

The handle should be a mild pullback on relatively light volume. It's a

shakeout of weaker holders — those not committed to holding the stock longer
term. A sharp decline of more than 12%-15% on heavy volume could indicate
a more serious sell-off that might prevent the stock from launching a successful
move.

The handle should form in the upper half of the base. If it begins forming too
soon (i.e., in the lower half of the base), it could mean institutional buying,
right now, is not as strong as it needs to be to push the stock higher.

Who are the weaker holders getting shaken out in the handle? Typically,
they're investors who bought late, right at the end of the prior uptrend. (See
Point 1, above). When the stock sold off to form the left side of the base, they
suffered a sharp loss. Getting a profit is no longer their goal. They just hope to
recoup some of their losses. So as the stock nears that old high — and the
weaker holders' break-even points — they start to sell.

Here's why that shakeout is healthy: If you have a lot of weak holders in a
stock, whenever the share price rises, they jump in to sell, which pushes the
price back down. Once they're out of the picture, it's easier for the stock to
move higher.

And what about the big investors who've been picking up shares as the stock
formed the right side of the cup? They're more committed and are holding
onto their shares. That's why the volume in the handle is light: Only the
weaker holders are selling. The large institutional investors are sitting tight in
expectation of a new upward climb.
 5. Ideal Buy Point: 10 cents above the peak in the handle

- Buying Range: up to 5% above the ideal buy point.

If the peak in the handle is, say, 30, then you add 10 cents to get the ideal buy
point of 30.10. The buying range would be from 30.10 to 31.60, 5% above the
ideal buy point.

For best results, buy as close to the ideal buy point as possible. If you're not
able to watch the market during the day, you can set conditional orders ahead
of time. Those trades get automatically triggered if the stock hits your target
purchase price. Ask your brokerage service how to set those up.

Don't Buy Extended Stocks

Once a stock climbs more than 5% above the ideal buy point, it's
considered extended or beyond the proper buying range. Stocks often pull back
a bit after a breakout. So if you buy extended, there's a higher chance you'll
get shaken out of the stock because it triggers the 7%-8% sell rule.

6. Volume on day of breakout: At least 40%-50% above average

On the day a stock breaks past its ideal buy point, volume should be at least
40%-50% higher than normal for that stock. That shows strong institutional
buying. On many breakouts, you'll see volume spike 100%, 200% or more
above average. Light or below-average volume could mean the price move is
just a head fake, and the stock is not quite ready for a big run.

Learn to recognize different chart patterns with IBD home study programs.

Cups: Cup-without-Handle
The cup-without-handle — also called a cup-shaped base or simply a cup — is a
variation on the cup-with-handle pattern. As the name implies, it's essentially the
same, except it doesn't have a handle. All the attributes, except for the buy point, are
identical.

The buy point in a cup-shaped base is calculated by adding 10 cents to the peak on the
left side of the cup — the most recent area of resistance.

Launching Gains from the Cup-with-Handle and Cup-without-Handle Bases

Below are examples of winning stocks that launched big runs from the cup-with-
handle and cup-without-handle patterns.

Both the daily and weekly charts are included. The weekly charts show the longer
term trend, while the daily charts show the action on the actual day of the breakout.
Be sure to use both! (See How to Read Stock Charts to learn more.)
=================
 The High Tight Flag
High Tight Flag Summary, Psychology, and Examples

The high tight flag chart pattern is an extremely rare, bullish formation.
Stocks that have amazing fundamentals generally form these. Despite the
already big move before the base emerges, the breakouts from this pattern
are explosive.

This pattern forms after a stock makes a gain of 100% or more in only 4 to
8 weeks and consolidates while pulling back less than 25% over the course
of 3 to 5 weeks.
 Psychology
This pattern is so powerful because even though the stock
has already gained more than 100%, doubling in value, the
pullback is extremely shallow which tells us there is
nobody interested in selling.

Key Points
 The High Tight Flag Pattern is the rarest chart
formation.
 The prior uptrend of 100% or more in 4-8 weeks.
 The base depth is 10-25%
 Buy point is the high of the flag plus 10 cents
Example
=====================================================

What Is A Stock Gap?

Why stock gaps occur and how to trade them.

Understanding how to trade gap ups or downs is a very powerful

trading skill. Often the biggest gainers of the day are stocks that gap
up, but what is a stock gap? In this post, we will quickly explain what a
stock gap is, why stock gaps occur, and how to properly trade them.
 What is a stock gap?
When a stock moves either up or down in after-hours trading, when
the general market is closed, it results in the stock opening at a
different price than what it closed at the prior trading day. A gap-up is
when the stock opens at a higher price than what it closed at the
previous trading day. A gap-down is when the stock opens at a lower
price than what it closed at the previous day. A ton of sites
like BarChart.com will have lists of the stocks pre-market with the
largest gap-ups or gap-downs.

Why do stocks gap up?

The most common reason for stocks that are gapping up or down is a
news catalyst. When news is released during pre-market or after-hours
it generally results in the stock opening at a different price than it
closed the prior trading day. Other common examples that cause a
stock to gap up or down are analyst upgrades or downgrades, press
releases, trial results, or quarterly earnings releases. Stocks don’t
always have a major catalyst for gapping up or down, it could simply
be due to supply and demand. At times, you will see stocks gap up on
big volume simply because institutions have decided to pile in and
position themselves, with no obvious catalyst.

How do I trade stock gaps?

One of the topics in our Leadership Blueprints course focuses on the
characteristics to look for in a winning gapper. All gap ups are NOT
created equal and it is important that you know what separates a stock
gap with potential vs one that is likely to fade. One of the biggest
factors for gap ups is the amount of volume behind the move. If the
gap up is on light volume, this really doesn’t tell us much. However, if
it occurs on BIG volume, this is an indication of new institutional
interest. When there is big volume on a gap up, there is almost always
a change in the story of the stock. There has been a fundamental
change or turnaround in the company and therefore the technicals are
going to change as well as the big institutions get involved.

Another important factor in determining the quality of a gap-up is the

closing range of the candle. You want to see a gap-up ideally close in
the upper 50% of its daily trading range.

Strong Gaps

 Big Volume
 Catalyst
 Closes in upper 50% of daily candle
 Opens at new highs or above prior resistance
 General Market Uptrend

Weak Gaps
 Light Volume
 No Catalyst
 Closes in lower 50% of daily candle
 Opens below prior resistance
 General Market Downtrend
==================================

How to trade rising and falling wedge patterns

A wedge is a common type of trading chart pattern that helps to alert traders to a
potential reversal or continuation of price direction. Whether the price reverses the
prior trend or continues in the same direction depends on the breakout direction
from the wedge. Wedges are a useful chart pattern to understand because they are
easy to identify, and departures from a previous pattern may present favourable
risk/reward trading opportunities.

QUICK LINK TO CONTENT:

1. What are wedge chart patterns?
2. What is a rising or ascending wedge?
3. What is a falling or descending wedge?
4. How can wedge patterns be used in combination with divergences?

5. How can I automatically identify rising/falling wedges?

6. How do you trade a rising or falling wedge pattern?

What are wedge chart patterns?

Wedges occur when the price action contracts, forming a narrower and narrower
price range. If trendlines are drawn along the swing highs and the swing lows, and
those trendlines converge, then that is a potential wedge.
Wedges can be rising or falling. They can also be angled — for example, where
there is a downtrend or uptrend and the price waves within the wedge are getting
smaller.

Here’s an example of a falling wedge in an overall uptrend, which uses the Oil &
Gas share basket on our Next Generation trading platform.

Wedges can present as both a continuation and a reversal pattern. This means the
price may break out of the wedge pattern and continue in the overall trend
direction of the asset. However, the price may also break out of a wedge and end a
trend, starting a new trend in the opposite direction.

In the chart example above, the falling wedge ended up being a continuation
pattern. This is because the overall trend was up to begin with, so when the price
broke out of the wedge to the upside, the uptrend continued. In this case, the
pullback within the uptrend took on a wedge shape.

Learn more about trading trends and reversals.

What is a rising or ascending wedge?

A rising wedge occurs when the price makes multiple swings to new highs, yet the
price waves are getting smaller. Essentially, the price action is moving in an
uptrend, but contracting price action shows that the upward momentum is slowing
down.
The Cyber Security share basket, which is also available to trade on our platform,
provides an example of an ascending wedge. The price action is moving up within
the wedge, but the price waves are getting smaller.

When a rising wedge occurs in an uptrend, it shows slowing momentum and may
forecast a future drop in price. A drop occurred once the price broke below the
rising wedge. However, in this case, the drop was short-lived before another rally
occurred.

When a rising wedge occurs in an overall downtrend, it shows that the price is
moving higher, (causing a pullback against the downtrend) and these price
movements are losing momentum. This indicates that the price may continue to fall
lower if it breaks below the wedge pattern.

What is a falling or descending wedge?

A falling wedge occurs when the price makes multiple swings to new swing lows,
but the price waves are getting smaller. This creates a downtrend where the price
waves to the downside are contracting or converging.

Our USD/CAD chart below provides an example of a falling wedge.

 When a falling wedge occurs in an overall downtrend, it signals slowing downside
momentum. This may forecast a rally in price if and when the price moves higher,
breaking out of the pattern.

When a falling wedge occurs in an overall uptrend, it shows that the price is
lowering, (causing a pullback against the uptrend) and price movements are getting
smaller. If the price breaks higher out of the pattern, the uptrend may be
continuing.

How can wedge patterns be used in combination with divergences?

Wedge patterns are often, but not always, associated with divergence on price-
momentum oscillators such as the stochastic oscillator or relative strength
index (RSI).
Divergence occurs when the price is moving in one direction, but the oscillator is
moving in the other. This tends to occur with wedges because the price is still
rising or falling, but with smaller and smaller price waves. The oscillator reflects
this by starting to move in the opposite direction as oscillators are measuring price
momentum. Learn more about trading on momentum.
A stochastic has been added to the falling wedge in the USD/CAD price chart
below. While the price falls, the stochastic oscillator not only fails to reach new
lows, but it also shows rising lows for the latter half of the wedge formation. This
indicates that downside price momentum is slowing.

The upside breakout in price from the wedge, accompanied by the divergence on
the stochastic, helped anticipate the rise in price that followed.

How can I automatically identify rising/falling wedges?

Software can be used to detect rising and falling wedge patterns. For example, our
trading platform comes with an automatic built-in chart pattern screener. To find
this useful tool on Next Generation, follow the below steps:
1. Open the trading chart of a financial product of your choosing. This could be a
stock, forex pair or commodity, for example. We offer over 10,000 financial
instruments to trade on.
2. Along the bottom of the platform, select the tab “Patterns”.
3. Then, select the “Wedge” option. The software will automatically draw wedge
patterns on the chart, past and present.

4. Traders can then use these patterns to see how price moved following prior
wedges and to spot current wedges that may present trading opportunities.

Since the patterns are drawn based on automated software, use discretion when
deciding which wedge patterns to use for trading or analysis.

How do you trade a rising or falling wedge pattern?

The following is a general trading strategy for wedges and should not be followed
dutifully. It can be customised based on how far the trader thinks the price may run
(target) following a breakout and how much they wish to risk. Larger stop-losses
have a smaller chance of being reached than smaller stop-losses, while larger
targets have less of a chance of being reached than smaller targets.

Here are some general strategy steps for trading a wedge pattern.

1. Identify the wedge on a chart. Draw trendlines along the swing highs and the
swing lows to highlight the pattern.
2. Watch for the breakout. This means the price moves outside the drawn wedge
pattern.

3. Confirm the breakout. Verify that the price has moved outside the wedge. Check
the trendlines to make sure that you have drawn them to your liking (typically,
they are drawn along, and connecting, swing highs and lows).

4. Enter the trade. You could open a buy position if the price passes above the
upper trendline of a descending wedge, or a sell position when the price falls
below the lower trendline of an ascending wedge. Once the price has broken out,
it will sometimes come back to retest the old trendline of the wedge. This can
provide another entry opportunity.

5. Set a stop-loss order for the trade. Some traders opt to place their stop-loss just
outside the opposite side of the wedge from the breakout. Others may place the
stop loss closer to keep the stop-loss size smaller. Risk-management is an
important element of trading.
6. Set a profit target or choose how you will exit a profitable position. An estimated
profit target may be the height of the wedge at its thickest part, added to the
breakout/entry point.

7. A trailing stop-loss could also be used. If the price action moves favourably, the
stop loss is trailed behind the price to help lock in profit.
8. Consider the risk/reward ratio before proceeding. After establishing the entry,
stop-loss and target, consider the profit potential that the trade offers. Ideally, the
potential reward is twice as much as the risk. For example, if the profit target is
1000 points above the entry, as in the chart below, then ideally, the difference
between the entry stop-loss (risk) is 500 points or less. If the potential reward is
less than the risk, it will be more difficult to make money over many trades,
since losses will be bigger than profits.
https://www.cmcmarkets.com/en-gb/trading-guides/wedge-patterns

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