From the past to the present, humanity has tried to understand the Universe and the surrounding World. Where does this understanding come from? Have we been able to understand the World? Humans try to interpret everything they see.
I remember trying to find a familiar pattern from everything I saw as a kid. For example, I used to watch clouds and find geometric shapes and animals in them.
Sometimes I even saw the words in the shape of clouds and stones. It may be seemingly untrue, but today people see Islands, Shoulders, Necks, and even Cups in the price chart. How accurate are these patterns? Are these patterns beneficial and profitable?
When I first entered the Market, I only recognized geometric shapes such as Triangles and Rectangles. Later, I understood that familiar shapes are guidance for price actions.
Let me tell you something. Others also see these patterns, and maybe we can analyze them and profit from them. What is your view? Whatever the truth is, I made a good profit from this method, and I’m sure you can make it too. Could you give me the benefit of the doubt?
And I’ll tell you all I know. Trust me. It’s not Rocket science. Maybe the first question that comes to you is this: Why do patterns are seen? It was the answer I gave myself when I first entered market analysis:
These patterns exist due to the unconscious behavior of the human brain. In simpler words, when I see a Reversal Pattern in a Bearish Trend, I start buying; others also see this pattern and start buying, So the power of this pattern will intensify.
In technical analysis, Classical Price Patterns show changes in the Market trend from Bullish to Bearish or vice versa. But these patterns don’t just cause reversal actions; in some cases, they increase the value of movement and make the chart continue its trend with more strength.
- An exciting question: The buyer and the seller know that the price will rise after this pattern, so why do sellers sell to buyers? Don’t they know that the price is going up?
Maybe they mistakenly saw a Continuation Pattern in the chart and decided to sell their stock or any property.
- I was joking; of course, this is not a real reason; we will discuss this issue by and by.
- How can you recognize these patterns? Do you know which patterns will return the price and reverse the trend? If your answer is no, You have chosen an excellent article to read. Because I’m going to teach you every detail I know about patterns in this article.
- So, Wrap up!
Classic Price Patterns are recognizable patterns made by price actions on a chart. We are looking for patterns we can use to predict the trend direction and possibilities of stock price. I’m sure that you will be able to find a pattern wherever you see the chart after this tutorial.
Maybe you could find the shape of a cup in the chart, you might think I’m joking with you, but we have a pattern called the cup and handle. So don’t be surprised if you see a cup in the chart; try to drink some profit from this cup. Time is money so let’s go down to Business.
Types of Classic patterns
As I told you, we have two types of patterns in the chart; Reversal and Continuation Patterns. In this article, I will introduce these two types of patterns to you; later, I will teach you each in an advanced way.
When you see a Reversal Pattern on your Bullish Trend chart, you should wait for the price to back down and reverse the Trend. Or you have a Downtrend, so there is a possibility to reverse the trend to a bullish one.
I know you are wondering where I should open the trade and where I should put my Take Profit and Stop Loss trigger. Don’t worry; everything is clear as a sunny sky. Just be patient because I’m going to explain everything from recognizing these patterns to analyzing and trading on them.
I’m going to teach you the most important Reversal Patterns like:
- Double Top and Double Bottom Patterns
- Triple Top and Triple Bottom Patterns
- Rounding Top and Rounding Bottom Patterns
- Head and Shoulders and Inverse Head and Shoulders Patterns
- Diamond Top and Diamond Bottom Patterns
- Three Falling Peaks and Three Rising Valleys Patterns
- Bump-and-Run Reversal Pattern
- Fan Principle
- Rising Wedge, and Falling Wedge Patterns
- Ascending Broadening Wedge, and Descending Broadening Wedge Patterns
- Island Pattern
These patterns will be formed at the end of Bullish Trends and change the price trend to a Bearish Trend. Of course, all these patterns are also created on the reverse side at the Bottom.
I will discuss all these patterns with you soon. But for now, I want to briefly explain my favorite ones, like the Double Top Pattern and Head and Shoulder Pattern. But I know the most important thing for you is how to trade on these patterns, and you will get there step by step.
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Double Top Pattern
The first pattern I want to discuss is the Double Top Pattern. In my city, There is a mountain with two peaks of the same height. I remember when I first saw this pattern, which reminded me of Sunday’s hiking on that mountain.
If I want to explain forming this pattern, I have to say it this way: The price reacts to a Resistance zone and makes a Peak for the first time.
And then, The Price will react to this Area again, so it makes a Double Top; In this situation, We know that a reversal pattern has formed. And the reason can be that the power of sellers has become superior to the power of buyers at this price.
We should look for a confirmation that gives us a reason to open a short trade. I have seen these patterns over and over on charts. Let’s get more familiar with the shape of these patterns.
Neckline: The lower Support Line in the Double Top Pattern is called the Neckline. In the Double Bottom Pattern, The upper Resistance Line that keeps the price down until it hits the second Bottom is called the Neckline. We take this name from the Head and Shoulder Pattern and use it for the rest of the patterns.
I have seen even three equal Tops, that we call the Triple Top and Triple Bottom Pattern. It’s better to know that if the number of peaks increases, it indicates that the Resistance zone is more substantial, and sellers do not allow this price to pass the Resistance. An example on the chart; it has made an excellent return to the price trend.
You can find this pattern in Bearish Trends too. And in Downward Trends is also a sign of the reverse of the trend to the upward direction. I call it the Double Bottom Pattern, And it can be in the form of Three Bottom Patterns too.
When this pattern occurs at low prices, It is considered a return action. So it’s a good idea to open long trade.
Here I found an example of this pattern on the price chart. You can also search for patterns like this and see what happens after this pattern. This chart shows that the price has ended its trend after forming this pattern, and a new trend has started.
It is good to know that there are other types of Double Bottom and Double Tops Patterns that I will discuss in detail in the following articles.
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Head and Shoulders Pattern
The first time I heard this pattern’s name, I understood why they called it Head and Shoulder. Because the shape of this pattern is like a human, It has one Head and two Shoulders.
The Head and Shoulders Pattern is one of the valid patterns in the market that I’m very interested in; I’m making a good profit from it. So accept this advice from me: Learn it properly.
This pattern appears at the end of the Bullish Trend and returns the price direction to a Downward Trend. Making Profit from the Head and Shoulders Pattern is only possible in two-sided Markets.
There is another major in this pattern. We call it Neckline. I know I talked about this Topic before, But I want to repeat it here because the Neckline is very important in the Head and Shoulder pattern. In this pattern, The line that connects the Head and Shoulders is called the Neckline.
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Inverse Head and Shoulders Pattern
There is also a reversal type of Head and Shoulders in the chart; I call it Inverse Head and Shoulder; This pattern appears at the end of the Downward Trend and causes a change in its tendency to the Bullish Trend.
I use this pattern a lot. Therefore, I can find many examples of this pattern on the chart. Here I got one of them; Look how this pattern changes the trend of BTC/USDT and makes the price start a Bullish Trend.
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These patterns are in the middle of the trends. And indicate that the price will continue on its trend. Imagine that you are driving on a Highway, And you see a sign that says “Chicago,5 Miles away”.
So you have to keep going on your way. These patterns are like the Chicago sign; The price has to continue its trend.
Sometimes I have a trade, and I want to know how long I should stay in this position. Whenever I see these patterns, I’ll start thinking that I should wait for more to take more profit from this position. Because when this pattern occurs, the price will continue its trend.
After seeing this pattern, You should open a trade in the direction of the trend because the price is supposed to continue the same trend. I know it’s confusing but don’t worry, You will learn everything.
Types of Continuation Patterns:
Here I have written some kinds of Continuing Patterns for you:
- Symmetrical Triangle Patterns
- Ascending Triangle and Descending Triangle Patterns
- Expanding Triangles
- Flag and Pennants Patterns
- Cup and Handle and Inverted Cup and Handle Patterns
- Ascending Scallop and Descending Scallop Patterns
- Dead Cat Bounce Pattern
- Price Channels
- Pitchfork Patterns
- Long Island Pattern
* We have another Continuation Pattern called Price Channel. The Price Channel is also a Continuing Pattern. But it is a little bit different from these patterns. I will explain it in the next article.
Most of the time, these patterns are a Continual Type, but sometimes they are also found in the chart as a Reversal Pattern such as:
- Symmetrical triangles Pattern
- Ascending Triangle and Descending Triangle Patterns
- Expanding Triangle
I will discuss each of these patterns in the future. For now, I want to introduce the patterns that I like very much to you. I trade mainly on these patterns.
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In this kind of pattern, the price has a sharp rise, like a Flag Pole. After this sharp rise, the price becomes range for a while. If the range part or pullback is rectangular, We call it the Flag Pattern.
But if this range converges and our pullback takes the shape of a triangle, we call it a pennant Pattern. In Flag Pattern, the pullback is in a parallel channel, but in a pennant or triangle pattern, the pullback moves in a convergent channel. These patterns are in both Bullish and Bearish Trends.
I found some examples of the Flag Pattern on a chart for you to better understand what I mean.
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The second one is the Pennant Pattern. Years ago, Pirates used Triangular Flags as the sign of their ships called Pennants. This name is now used on continuing convergent patterns.
In this category of Continuation Patterns, I can name Symmetrical Triangle Pattern, Ascending Triangle Pattern, and Descending Triangle Pattern, which are kinds of Pennant Patterns. I will discuss the difference later.
In the Pennant Pattern, the trend becomes weak in both the Up and Down directions. I have seen this pattern in the chart a lot; when I see this pattern, I increase my Profit Limit because I know I will make more profit in this position.
I found another Pennant Pattern on a Bearish Trend for you:
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Cup and Handle Pattern
My HatTrick, and the last pattern is the Cup and Handle Pattern, which is in the Continuing Pattern Category.
I remember it was the 2020Winter; I saw a Cup and Handle Pattern on the XAUUSD chart, so I decided to open a long position trade happily; I made a +20% profit from that position.
It proved to me that in the Winter, after a Cup of Coffee, a Cup of Profit is very delicious. The Cup and Handle Pattern is a Continuation Pattern, and its shape is similar to a Cup. We usually trade on the Second part of the pullback, shaped like the handle of cups.
There is also an inverse Cup and Handle Pattern on the Tops. But be careful not to burn yourself. I will discuss it in the following article. Remember, always use it from the Handle of the Cup.
I just wanted to explain Reversal and Continuation Patterns in this article and mention some of my favorite Patterns. Indeed I cannot explain all of them in one article, But I promise you that I will teach you all the details about these Patterns in the following article.
You learned a lot about the Price Action Pattern, and now the chart has become more attractive to you. Remember that chart patterns are one of the essential analysis components, so you must learn these patterns, like riding a Bicycle.
But consider that trading on these patterns is hazardous, don’t take risks until you become a professional trader. You can have a Personal Style.
Remember that not everyone sees stars in the same patterns. I saw a Cup; maybe you can find me an Elephant in the Market. And trust me, don’t trade until I teach you everything. Will the trend return? Does the price continue in its direction?
- No one knows.
- I can only take risks in my analysis.
- Money Management is the last secret to my success and permanence before using patterns.
- I highly recommend you have your strategy of capital management.
Good luck and be profitable.