When it comes to technical analysis, the first thing traders are made aware of is that markets move in patterns. Naturally, we become obsessed with patterns and identifying patterns to help us take advantage of market movements and turn a profit. What are the best trading patterns every trader needs to know? You will find that answer in this blog post where we talk about the top 6 trading patterns every trader needs to know!
Here is a short list of the top 6 patterns:
- Ascending Triangles
- Descending Triangles
- Double tops
- Double Bottoms
- Head and Shoulders
- Cup and Handles
To use these patterns effectively, you will first need to learn how to read market structure. Understating how the market moves makes these patterns noticeable and possible. The patterns need to be taken in conjunction with the current market trend and the structure.
 Ascending Triangles
 The ascending triangle is a part of the triangle pattern family in trading. This pattern is a technical pattern that shows traders bullish accumulation where higher lows print and equal highs.
This pattern can form in a continuation move of an uptrend or a reversal pattern of a downtrend. The point is the latter part of the move is to the upside. More often than not a continuation pattern. Depending on where it forms in relation to structure.
You may be able to connect the two pattern lines to actually form the triangle as illustrated below but it’s not always a guarantee they’ll connect. However, they will typically get very close.
Examples:
The Ascending triangle pattern is used as a confirmation tool that the upside trend will continue. It is used in either a breakout trade idea or a pullback trade idea. A trade would either enter on the break of the equal high top or wait for the break of that level and pull back into the broken top to grab the long.
When it comes to this pattern you want to see potential candlesticks form wicks on the bull side so you can see that the long side strength is coming out. Typically these are observed on a 1-3 month basis. However, if you are a day trader you can still notice triangles forming like in the image above where the pattern occurs within minutes.
Descending Triangles
 The descending triangle is a part of the triangle pattern family in trading. This pattern is a technical pattern that shows traders bearish accumulation where lower highs print and equal lows.
This pattern can form in a continuation move of a downtrend or a reversal pattern of an uptrend. The point is the latter part of the move is to the downside. More often than not a continuation pattern. Depending on where it forms in relation to structure.
You may be able to connect the two pattern lines to actually form the triangle as illustrated below but it’s not always a guarantee they’ll connect. However, they will typically get very close.
Examples:
The descending triangle pattern is used as a confirmation tool that the downside trend will continue. It is used in either a breakout trade idea or a pullback trade idea. A trade would either enter on the break of the equal low bottom or wait for the break of that level and pull back into the broken low to grab the short.
When it comes to this pattern you want to see potential candlesticks form wicks on the bear side so you can see that the short side strength is coming out. Typically these are observed on a 1-3 month basis. However, if you are a day trader you can still notice triangles forming like in the image above where the pattern occurs within minutes.
In relation to triangles, both ascending and descending, we have chart patterns that are called wedges and seem to be interchangeable with triangles. So confusing the two may be easy. However, don’t put too much strain on what things may be called, just know what to do when you a rising/falling wedge or triangle pattern.
 Double Tops
 The double top is a very common chart pattern for trades beginning. It resembles an “M” on a chart. It is used to identify a rejection at a key level for a continued push to the downside of prior resistance. When day trading the double top could happen in minutes or it could be a little more elongated based on what timeframe you use.
The double top is formed from two consecutive v-top rejection patterns. They could be rounded tops as well that don’t instantaneously reject a key resistance level. They often happen at the end of an extended bull run and show a key sell area where sellers come into the market with aggression. The second top is formed as the sellers from the first top come and reject the price once again.
Examples
This is an example of a double top where there are two potential ways to play this market. The large rejection at the first green circle is nearly impossible to play off, but what it does is that it gives you very important information. That potentially on the second test of that level we will see another rejection.
Brave traders may attempt to place a sell limit to get in where the red line is and a stop loss at the blue line above. This pattern is usually a bearish reversal of a larger trend or a bearish continuation on a slight pullback which creates the double top. The double top is created by a large number of sellers coming into the market at a point to stop the long buy wave that forced itself to this top.
The second way a trader may use the double top or enter into the pattern is the break and retest of the low of the double top which is the purple line. Waiting for that structure to break down and looking for the short on the retest where we have a yellow circle. The orange down arrows are what we should see on the pullback and press lower from the level.
Double Bottoms
The double bottom is a very common chart pattern for trades beginning. It is the counterpart and opposite of the double top, resembling a “W” on a chart. It is used to identify a rejection at a key level for a continued push to the upside of prior resistance. When day trading the double bottom could happen in minutes or it could be a little more elongated based on what timeframe you use.
The double bottom is formed from two consecutive v-bottom rejection patterns. They could be rounded bottoms as well that don’t instantaneously reject a key support level. They often happen at the end of an extended bear run and show a key buy area where buyers come into the market with aggression. The second bottom is formed as the buyers from the first bottom come and reject the price once again.
Examples
This is an example of a double bottom where there are two potential ways to play this market. The large rejection at the first green circle is nearly impossible to play off, but what it does is that it gives you very important information. That potentially on the second test of that level we will see another rejection.
Brave traders may attempt to place a buy limit to get in where the green line is and a stop loss at the red line below in anticipation of the second green circle forming. This pattern is usually a bullish reversal of a larger bear trend or a bullish continuation on a slight pullback which creates the double bottom. The double bottom is created by a large number of buyers coming into the market at a point to stop the short sell wave that forced itself to this bottom.
The second way a trader may use the double bottom or enter into the pattern is the break and retest of the high of the double bottom which is the burgundy line. Waiting for that structure to break up and looking for the long on the retest where we have a yellow circle. The burgundy down arrows are what we should see on the pullback and press higher from the level.
 Head and Shoulders
The head and shoulders pattern is one of the most common in the world of trading. People know this pattern from far and wide and love to notice its formation for potential trade opportunities. This chart pattern formation is created by three peaks and a baseline. The middle peak is the highest, or the head and the two side peaks are slightly shorter or the shoulders. Which are not necessarily even all the time? The pattern is supposed to anticipate a bullish or bearish reversal. People trust the head and shoulders reversal, as one of the most reliable reversal patterns.
The pattern identifies a slow down in the momentum of the market, whether its an uptrend or a downtrend. The highest peak or the head is a new high or low which indicates that the structure of this move will continue as long as the impulse at the neckline is held. When the third peak or second shoulder forms, and you notice it’s lower (bull move) or higher (bear) move than the head, you can identify that this is a slow down in momentum based on simple market structure principles. The breakdown of the neckline is where we identify the best of opportunities.
Examples
The head and shoulders aren’t always perfect information and can look a little wonky, just like the example below. Where we have the head and shoulders outlined in blue and the neckline which is in yellow. When we get the break of the yellow line, we do continue higher and even attempt to retest the break out for another opportunity to the upside.
There are more clean head and shoulder patterns as well, such as the one below. The example above is a bearish head and shoulders reversal pattern, while the one below is a bullish head and shoulders reversal. The bottom line is you can have either, as long as you understand that you would want to take advantage of the break of the neckline and how they form.
Cup and handle
The final pattern that you should know as a trader is the cup and handle chart pattern. This is the most obscure of the lot that you may not even have heard of. Named after it’s resemblance to a coffee mug. The cup is a “U” share and the handle to drift slightly downward. There is an inverse cup and handle as well.
The normal cup and handle is considered to be a bullish continuation pattern on a pullback with the handle. The inverse is a bearish continuation candle.
The way to cup and handle is used is most effective when traders watch the end of the cup portion form in an upward slope and wait for the handle pullback to form to grab the long for the next wave to the upside.
When looking to trade the cup and handle pattern you have a few options to get into the trade. The first is to try to anticipate where the pullback will end, with market structure and order flow tools you could get long. The second is to look for a break out of the top of the handle and the market. Traders often place their stop losses below the handle bottom and aim for the length of the cup from bottom to break out point. If the distance from the bottom to the break out point on the cup and handle is 20 points then that will be the profit target.
Examples:
In the example below, you can see that the pattern isn’t necessarily perfect, however you can see how well it does work if you can identify it. We have a breakout neckline in orange. We also have two levels where traders may be interested in the long opportunity. The first is at the pullback into the yellow line which was prior resistance turned support, also the bottom of the cups handle. The next level is the top of the handle which is the orange line or the break line for the breakout to the upside.
Conclusion
There are many trading patterns that trade should know, but these 6 trading chart patterns are the ones that every trader should know to take advantage of these markets! They go in order from easiest to most challenging. Learn the basics first in triangles and tops/bottoms before getting into the more advanced patterns.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
