What are Price Patterns?

Price Patterns are shapes or formations on charts that can be categorized and used to predict future price movements.

These patterns have been seen repeatedly across different charts and times, proving their reliability.

• Duration: Price patterns can last from a few days to several months or even years. Longer patterns usually lead to more significant price moves.
• Price Targets: The targets from these patterns estimate how far the price might move, but they are approximate.
• Interpretation: Analysing patterns involves both skill and flexibility. Patterns may not match the textbook description perfectly but can still be valid.
• Considerations: Always look at the price behaviour and the time it takes for the pattern to form to get a complete picture.

Classification of Patterns

Reversal patterns are important signals in trading that suggest a current trend (whether it's going up or down) might soon change direction. They usually appear after a long period of a particular trend. These patterns help traders predict when a trend might be ending and a new one might start.

Common examples of reversal patterns include:

1. Head & Shoulders
2. Double Top/Double Bottom
3. Triple Top/Triple Bottom
4. Broadening Formations
5. Rounding Bottom/Rounding Top or Cup & Handle Pattern

Continuation patterns are signals in trading that suggest a brief pause in the current trend, but the trend is likely to continue in the same direction after the pause. In other words, the trend takes a short break and then keeps going.

Common examples of continuation patterns include:

1. Flags
2. Pennants
3. Triangles: Ascending Triangle/Descending Triangle
4. Rectangles:

Both Continuous and Reversal Patterns

Rising/Falling Wedges

In this blog, we will have a brief look at how these patterns look.

Double Top : A Double Top is a bearish reversal pattern that signals a potential end to an uptrend. It forms when the price creates two high points (highs) at nearly the same level, separated by a period of time.

• Prior Trend: There must be a strong upward trend.
• First High: The price reaches a high point and then pulls back slightly.
• Second High: The price rises again to a similar level as the first high but on lower trading volume.
• Pattern Completion: The pattern is completed when the price drops below the lowest point between the two highs, confirming a trend reversal. This drop should happen with an increase in trading volume.

Tip: One will find double top developing often in stocks but one must look at the prior trend and volume to rely on the formation.

Double Bottom

A Double Bottom pattern is a bullish reversal pattern signalling a potential end to a downtrend.

• Prior Trend: There must be a strong downward trend
• First Low: The price hits a low point (low) and then starts to rise.
• High: After the first low, the price climbs and forms a high point (high), which may look slightly rounded.
• Second Low: The price drops again, creating a second low at a similar level to the first, but with lower trading volume.
• Pattern Completion: The pattern is completed when the price rises above the highest point between the two lows, indicating a reversal of the downtrend. This breakout should occur with increased trading volume.

Triple Top

A Triple Top is a bearish reversal pattern that indicates the potential end of an uptrend. It features three distinct high points at roughly the same price level. Here’s a simplified explanation:

• Prior Trend: There must be a strong upward trend before the Triple Top forms.
• Three Highs: The price reaches three highs, each at a similar level, and these highs are well-spaced, marking turning points where the price starts to drop after each high.
• Volume: During the formation of the Triple Top, trading volume usually decreases, with the highest volume at the first high and lower volume on the following highs. However, when the price finally breaks below the support level (the lowest point between the highs), volume should increase, confirming the pattern.

Tip: Pattern is complete when the both lows have been broken on heavier volume.

Triple Bottom

A Triple Bottom is a bullish reversal pattern that signals the potential end of a downtrend. It features three distinct low points at roughly the same price level.

• Prior Trend: There must be a strong downward trend before the Triple Bottom forms.
• Three Lows: The price hits three low points, each at a similar level, and these lows are well-spaced, marking turning points where the price starts to rise after each low.
• Volume: During the formation of the Triple Bottom, trading volume usually decreases, with the highest volume at the first low and lower volume on the following lows. However, when the price finally breaks above the resistance level (the highest point between the lows), volume should increase, confirming the pattern.

Head & Shoulders

• Prior Trend: For a Head & Shoulders pattern to be a reversal signal, there must be a clear uptrend before it forms. Without this uptrend, the pattern can't signal a reversal.
• Left Shoulder: During an uptrend, the price hits a high point (left shoulder) and then drops a bit. This drop usually stays above the trend line, so the uptrend continues.
• Head: After the drop from the left shoulder, the price rises again, reaching a new high (the head). After this high, the price drops again, creating a low point that helps form the neckline.
• Right Shoulder: From the low of the head, the price rises again but doesn’t reach the height of the head. This high (right shoulder) is usually around the same level as the left shoulder. The final decline should break the neckline, completing the pattern.

Inverse Head and Shoulders

The Inverse Head and Shoulders, signals a potential change from a downtrend to an uptrend. Here’s how it forms:

1. Prior Trend: There must be a clear downtrend before this pattern can signal a reversal. Without a downtrend, the pattern doesn’t work.
2. Left Shoulder: During the downtrend, the price drops to a low point (left shoulder) and then starts to rise.
3. Head: After the rise from the left shoulder, the price drops again to a lower point (the head), then rises again, creating a high point that helps form the neckline.
4. Right Shoulder: The price drops from the high of the head to form another low (right shoulder). This low should be higher than the head and usually around the same level as the left shoulder. The final rise should break above the neckline, completing the pattern.

When the price breaks above the neckline, it suggests the downtrend may be ending, and the price could start rising.

Broadening Formations

Broadening Formations are patterns where the price creates an expanding triangle. Unlike regular triangles, where the trend lines come together, broadening formations have trend lines that spread out, making the shape of an expanding triangle.

In simple terms, as the price moves, the highs and lows get further apart, creating a pattern that looks like an expanding triangle.

Broadening Bottoms

A Broadening bottom looks like a megaphone and appears during a downtrend. It features:

• Higher Highs and Lower Lows: The price makes progressively higher highs and lower lows, creating a wide, expanding shape over time.

This pattern is a bullish reversal signal, meaning that after it forms, the price trend is likely to shift from down to up.

Volume: Trading volume is often uneven but tends to rise when the price goes up and fall when the price goes down.

Broadening Wedges Ascending

A Broadening Wedges Ascending is a bearish reversal pattern where:

• Trend Lines: Two trend lines slope upwards and get wider apart over time.
• Volume: Trading volume usually increases as the pattern develops.

This pattern indicates that the current uptrend might be ending and a downtrend could begin

Broadening Wedges Descending

A Broadening Wedges Descending is a bullish reversal pattern where:

• ‍Trend Lines: Two trend lines slope downwards and get wider apart over time.‍
• Volume: Trading volume typically increases as the pattern forms.

This pattern suggests that the downtrend might be ending and a new uptrend could start.

RISING WEDGE

A Rising Wedge is a bearish pattern that forms when prices start wide at the bottom and gradually narrow as they move higher. This pattern slopes upward and signals a potential drop in prices. Here's a simple breakdown:

• Bearish Bias: A rising wedge generally indicates that prices are likely to fall, even though the pattern slopes upward.
• Continuation Pattern: If the wedge forms during a downtrend, it suggests the price might continue to fall after a brief upward movement.
• Reversal Pattern: If the wedge forms during an uptrend, it signals that the upward trend may be ending, and a downward trend could begin.

Regardless of whether it's a continuation or a reversal, a rising wedge usually predicts a drop in prices.

Falling Wedge Pattern

A falling wedge is a chart pattern that looks like a downward-sloping cone. It starts wide at the top and gets narrower as the price moves lower.

• Bullish Signal: It’s considered a bullish pattern, meaning it suggests the price might go up after the pattern forms.
• Continuation Pattern: If the price was going up before the falling wedge, it means the wedge is just a pause, and the uptrend is likely to continue after the pattern completes.
• Reversal Pattern: If the price was going down before the falling wedge, it indicates that the downtrend might end, and the price could start going up.

Overall, whether it’s a continuation or a reversal, a falling wedge generally suggests that prices are likely to rise after the pattern finishes.

Rounding Top

• The price trend slowly curves downward over time, creating a rounded shape.
• Bullish Signal: This pattern is known as a bullish consolidation pattern, which means it suggests that after this gradual downward curve, the price is likely to start moving up

Rounding Bottom

A rounding bottom pattern is a bullish consolidation pattern where the price trend gradually curves upward over time, resembling the shape of a cup. This pattern suggests that the market is slowly gaining strength and is likely to continue rising after the consolidation period.

FLAGS & PENNANTS

Flags and Pennants are short-term continuation patterns that show a brief pause in a strong price move before the trend continues in the same direction. These patterns appear after a sharp rise or fall in price with high trading volume.

Flags look like small rectangles that slope against the trend. This pattern looks like a small rectangle that slopes against the main trend. Volume usually decreases during the formation, then picks up again when the price breaks out of the flag.

Pennants have a triangular shape. This pattern looks like a small triangle with converging trend lines and resembles a short symmetrical triangle. Like flags, volume typically decreases during the pattern and increases when the price breaks out.

Both patterns indicate a short break before the price resumes its previous direction, whether up or down.

Rectangle

A Rectangle is a continuation pattern that forms when the price moves within a set range during a break in the trend. It looks like a rectangle because the price has two highs and two lows that create parallel lines at the top and bottom.

• Highs and Lows: The price hits similar high points and low points, creating a trading range.
• Other Names: Rectangles are also called trading ranges, consolidation zones, or congestion areas.

This pattern shows that the price is pausing and is likely to continue in the same direction once it breaks out of the range.

Rectangle Top

Bullish Rectangle Pattern: This is a bullish reversal pattern where the price also moves within a horizontal range, with two horizontal trend lines. When the price breaks above this range, it usually indicates an upward move.

Rectangle Bottom

Bearish Rectangle Pattern: This is a bearish reversal pattern where the price moves within a horizontal range, forming two horizontal trend lines. When the price breaks below this range, it often signals a downward move.

Symmetrical Triangle

A Symmetrical Triangle pattern forms when two trend lines come together and create a triangle shape.

• Upper Trend Line: Slopes downward, connecting lower highs.
• Lower Trend Line: Slopes upward, connecting higher lows.
• Apex: The point (intersection) where the two trend lines meet.

As the triangle forms, trading volume usually decreases. The pattern indicates that the price could break out in either direction when it reaches the apex.

Ascending Triangle

An Ascending Triangle is a bullish pattern that generally forms during an uptrend. It features:

• Horizontal Top Line: A flat line at the top, showing consistent resistance.
• Rising Bottom Line: An upward-sloping line connecting higher lows.

This pattern often signals that the price will keep rising after the triangle forms. It can also appear at the end of a downtrend as a reversal pattern, but it's usually a continuation pattern that shows the price is likely to keep going up.

A Descending Triangle is a bearish pattern that usually forms during a downtrend. It has:

• ‍Horizontal Bottom Line: A flat line at the bottom, showing consistent support.
• Downward-Sloping Top Line: A line sloping downwards, connecting lower highs.

This pattern often signals that the price will continue to fall after the triangle forms. It can also appear at the end of an uptrend as a reversal pattern, but it typically indicates the price is likely to keep going down.