Trading Patterns

Head and shoulders
Head and shoulders is a chart pattern in which a large peak has a slightly smaller peak on either
side of it. Traders look at head and shoulders patterns to predict a bullish-to-bearish
reversal.Typically, the first and third peak will be smaller than the second, but they will all fall
back to the same level of support, otherwise known as the ‘neckline’. Once the third peak has
fallen back to the level of support, it is likely that it will breakout into a bearish downtrend.
Double top
A double top is another pattern that traders use to highlight trend reversals. Typically, an
asset’s price will experience a peak, before retracing back to a level of support. It will then climb
up once more before reversing back more permanently against the prevailing trend.
Double bottom
A double bottom chart pattern indicates a period of selling, causing an asset’s price to drop
below a level of support. It will then rise to a level of resistance, before dropping again. Finally,
the trend will reverse and begin an upward motion as the market becomes more bullish.A
double bottom is a bullish reversal pattern, because it signifies the end of a downtrend and a
shift towards an uptrend.
Rounding bottom
A rounding bottom chart pattern can signify a continuation or a reversal. For instance, during an
uptrend an asset’s price may fall back slightly before rising once more. This would be a bullish
continuation. An example of a bullish reversal rounding bottom – shown below – would be if an
asset’s price was in a downward trend and a rounding bottom formed before the trend
Traders will seek

to capitalise on
this pattern by
buying halfway
around the
bottom, at the
low point, and
capitalising on
the continuation
once it breaks
above a level of
resistance.
reversed and entered a bullish uptrend.
Cup and handle

The cup and handle pattern is a bullish continuation pattern that is used to show a period of
bearish market sentiment before the overall trend finally continues in a bullish motion. The cup
appears similar to a rounding bottom chart pattern, and the handle is similar to a wedge
pattern – which is explained in the next section. Following the rounding bottom, the price of an
asset will likely enter a temporary retracement, which is known as the handle because this
retracement is confined to two parallel lines on the price graph. The asset will eventually
reverse out of the handle and continue with the overall bullish trend.
Wedges
A falling wedge occurs between two downwardly sloping levels. In this case the
line of resistance is steeper than the support. A falling wedge is usually indicative
that an asset’s price will rise and break through the level of resistance, as shown
in the example below.
Wedges form as an asset’s price

movements tighten between two sloping
trend lines. There are two types of
wedge: rising and falling. A rising wedge
is represented by a trend line caught
between two upwardly slanted lines of
support and resistance. In this case the
line of support is steeper than the
resistance line. This pattern generally
signals that an asset’s price will
eventually decline more permanently –
which is demonstrated when it breaks
through the support level.
Both rising and falling wedges are reversal patterns, with rising wedges
representing a bearish market and falling wedges being more typical of a bullish
market.
Pennant or flags
Pennant patterns, or flags, are created after an asset experiences a period of
upward movement, followed by a consolidation. Generally, there will be a
significant increase during the early stages of the trend, before it enters into a
series of smaller upward and downward movements.
Pennants can be either bullish or bearish, and they can represent a continuation
or a reversal. The above chart is an example of a bullish continuation. In this
respect, pennants can be a form of bilateral pattern because they show either
continuations or reversals.
While a pennant may seem similar to a wedge pattern or a triangle pattern –

explained in the next sections – it is important to note that wedges are narrower
than pennants or triangles. Also, wedges differ from pennants because a wedge is
always ascending or descending, while a pennant is always horizontal.
Ascending triangle
The ascending triangle is a bullish continuation pattern which signifies the continuation of an
uptrend. Ascending triangles can be drawn onto charts by placing a horizontal line along the
swing highs – the resistance – and then drawing an ascending trend line along the swing lows –
the support. Ascending triangles often have two or more identical peak highs which allow for
the horizontal line to be drawn. The trend line signifies the overall uptrend of the pattern, while
the horizontal line indicates the historic level of resistance for that particular asset.
Descending triangle
Symmetrical triangle
The symmetrical triangle pattern can be either bullish or bearish, depending on the market. In
either case, it is normally a continuation pattern, which means the
market will usually continue in the same direction as the overall trend
once the pattern has formed. In contrast, a descending
triangle signifies a bearish
continuation of a
Symmetrical triangles form when the price converges with a series of downtrend. Typically, a
lower peaks and higher troughs. In the example below, the overall trader will enter a short
trend is bearish, but the symmetrical triangle shows us that there has position during a
been a brief period of upward reversals. descending triangle –
possibly with CFDs – in an
attempt to profit from a
However, if there is no clear trend before the triangle
falling market.
pattern forms, the market could break out in either
direction. This makes symmetrical triangles a bilateral
pattern – meaning they are best used in volatile markets
where there is no clear indication of which way an asset’s
price might move. An example of a bilateral symmetrical triangle can be seen
below.

Trading Patterns

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Trading Patterns

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Head and shoulders

Traders will seek

Cup and handle

Wedges form as an asset’s price

While a pennant may seem similar to a wedge pattern or a triangle pattern –

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