Feeling Stuck in a Trading Block? Break out of the mould with these 10 Chart Patterns7 min read
For those looking to master the stock market, understanding chart patterns is essential. And if you have reached a point where you are out of trading ideas or stuck in a traders’ block, this article is just for you. Today, we will explore the top 10 chart patterns every trader needs to know about and how to spot them like a pro.
Chart patterns are formed by the movement of prices over time, and these can be of two types: Continuous patterns which indicate that price movement will continue in the direction of the trend and Reversal patterns which indicate a potential change in the direction of the trend.
There is no one-stop pattern which can help you in every situation. Hence, it is important to know what each pattern indicates and how you can spot them in a price movement.
1. Head and Shoulders
The head and shoulders pattern is a reliable reversal pattern that forms after an uptrend. The pattern is named for its resemblance to a head and two shoulders. The left and right shoulders are typically at or near the same price level, and the head is higher. When the price breaks below the neckline, it signals a bearish reversal.
Look out for the following sequence:
- Left shoulder: A price rise followed by a peak, followed by a decline.
- Head: A price rise again forming a higher peak than the previous one.
- Right shoulder: A decline of price again, followed by a rise to form the right peak, which is lower than the head.
For example: take a look at the chart pattern for TCS below to understand how price movement took place from the month of August 2019 to February 2020 forming three peaks, in the sequence we just discussed.
To view these charts on your Paytm Money account, go to the stocks dashboard -> search for the company name or symbol -> go to the advanced charts section or you can click on this link and checkout the above pattern for yourself: https://www.paytmmoney.com/stocks/company/1000000454?toggleDetails=true
2. Inverse Head and Shoulders
The reverse head and shoulders pattern is the opposite of the head and shoulders pattern. It forms after a downtrend and signals a bullish reversal. The left and right shoulders are typically at or near the same price level, and the head is lower. When the price breaks above the neckline, it signals a bullish reversal.
For example: In the movement of the stock SRF Limited below, we can clearly see that after forming an inverse head and shoulder the stock took a bullish turn to rise up to the price level of ~2490 which is a 300 points jump from the lowest peak.
3. Flag and Pennant
Flag and pennant patterns are continuation patterns that occur after a strong price movement. The flag pattern is characterized by a sharp price move followed by a period of consolidation, typically in the shape of a rectangle. The pennant pattern is similar to the flag pattern but is more triangular in shape. When the price breaks out of the flag or pennant, it signals a continuation of the previous trend.
For example: Take a look at the price movement of Titan from May 2020 up to Nov 2022. We see a price consolidation for the first half of 2021 after a steep rise in 2020. Followed by another rise in the period of Jun 2021 – Nov 2022. This rectangular consolidation is a flag pattern.
4. Trend Line
A trend line is a straight line that connects two or more price points and is used to identify the direction of a trend. An uptrend is formed by connecting two or more ascending lows, while a downtrend is formed by connecting two or more descending highs.
For example, take a look at HDFC displaying both an uptrend and a downtrend at different periods of time.
Uptrend
Downtrend
5. Trend Channel
A trend channel is formed by drawing parallel trend lines above and below the price action. The upper trend line connects the highs, while the lower trend line connects the lows. A bullish trend channel slopes upward, while a bearish trend channel slopes downward.
To determine the potential profit from a trade, it is important to consider the volatility of a stock. The trading channel technique tends to be more effective on stocks with moderate volatility.
For example: Take a look at HDFC again, showing an uptrend channel below.
6. Ascending Triangle
Triangles are continuation patterns that are formed when the price action consolidates into a triangular shape. An ascending triangle is formed by a horizontal resistance level and an ascending trend line.
In case the price breaks above the top of the pattern, a long trade is initiated; conversely, if the price breaks below the lower trendline, a short trade is initiated.
7. Descending Triangle
A descending triangle is formed by a horizontal support level and a descending trend line. A symmetrical triangle is formed by two converging trend lines, with neither line being horizontal.
Traders can take advantage of a breakdown by opening a short position when a descending triangle pattern is formed.
8. Double and Triple Tops and Bottoms
Double and triple tops and bottoms are reversal patterns that occur when the price fails to break through a certain level of support or resistance. A double top is formed by two price peaks at or near the same level, with a trough in between. A triple top is formed by three price peaks at or near the same level, with two troughs in between. A double bottom and triple bottom are the opposite of the top patterns.
Here is an example of a double top forming on HUL which might indicate a bearish movement if the price breaks below the support level in the upcoming days.
9. Cup and Handle
The cup and handle pattern is a bullish continuation pattern that is formed when the price consolidates into the shape of a cup, followed by a smaller consolidation period in the shape of a handle. The breakout from the handle signals a continuation of the previous uptrend.
For example: Take a look at the HDFC chart from 2022 which formed a cup and handle pattern followed by a continuation of the uptrend.
10. Rectangle
A rectangle pattern is formed when the price moves between two horizontal support and resistance levels. The pattern is characterized by a series of highs and lows that are roughly equal in price.
For example: Here is a rectangle forming on Bharti Airtel in 2021.
Mastering the stock market requires a deep understanding of chart patterns, and the ones we discussed are the most popular tools in a trader’s kit. However, chart patterns should always be used in combination with other technical analysis tools to yield the best results.
Written by: Veenal Bansal | Product Manager at Paytm Money
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