Chart Patterns in Finance: 10 Types of Stock Chart Patterns

A chart pattern is a visual display of a security's price movement. Composed of trendlines and curves, chart patterns represent the rising and falling fluctuations of a security’s price level and history.

A chart pattern consists of a line connecting different opening and closing prices. This offers a foundation for future price predictions. As a trading tool, chart patterns apply to a variety of financial markets, including forex (foreign exchange), equities, and commodities.

For technical analysis of the stock market, chart patterns are an essential tool. Financial analysts use price graphs with varying chart patterns to identify strong and weak securities. Stock chart patterns are also important because they help investors determine buying and selling positions.

There are two main types of chart patterns: continuation patterns and reversal patterns. While continuation patterns indicate a disruption in an existing trend, reversal chart patterns indicate a new direction for an existing trend. Within these two classifications, there are various chart patterns. Here are common chart patterns with which you can familiarize yourself:

1. 1. Ascending triangle: As a bullish continuation pattern, an ascending triangle indicates a breakout in an up or downtrend. Two lines, the support line and the resistance line, converge to form this chart pattern. The higher lows in the ascending triangle indicate the price has the potential to move past the resistance.
2. 2. Candlestick: The candlestick pattern includes a variety of different price fluctuations that map the opening and closing prices of stocks. Some types of candlestick patterns include the morning star, hammer, and bullish engulfing. Traders analyze candlestick patterns in conjunction with other technical indicators to develop trading strategies.
3. 3. Cup and handle: The cup and handle pattern forms a U-shaped cup followed by a short pullback. Cup and handle patterns signal a potential price break that can continue to increase and reach new highs.
4. 4. Descending triangle: Unlike an ascending triangle, a descending triangle results in a horizontal lower line and a descending upper trendline. This bearish chart pattern signals the demand for a given asset is declining, encouraging traders to enter short selling positions.
5. 5. Double bottom: A double bottom is a chart pattern that shows a price drop, a rebound, another price drop, and finally another rebound. On a graph, a double bottom resembles the shape of a “w,” signaling a trend reversal.
6. 6. Flag pattern: A distinguishing characteristic of flag patterns is two parallel trendlines. These lines can angle up, down, or sideways. Flag patterns typically signal declining volume.
7. 7. Pennant: Composed of two converging trendlines, pennants are a type of continuation chart pattern. Pennants can be bullish or bearish, indicating an uptrend or downtrend in price movement.
8. 8. Symmetrical triangle: When both the triangle’s upper and lower trends angle toward the center, the chart pattern shows a symmetrical triangle. This pattern signals a price consolidation within a given support and resistance level.
9. 9. Triple bottom: Three equal lows from a breakout above the resistance level comprise a triple bottom chart pattern. This bullish graph presents an opportunity for buyers to assume control of the price action.
10. 10. Wedge pattern: Wedges angle up or down, indicating either a disruption in an uptrend or a pause in a downtrend. While a rising wedge is a bearish pattern in a downtrend, a falling wedge is a bullish pattern that slopes down.

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