Types of Price patterns

There are different price/ chart patterns, each with its own rules, and they can be categorised as either a reversal or a continuation pattern.

Continuation patterns

A continuation pattern indicates that the price action will continue to move in the same direction even after the continuation pattern completes.

Cup and Handle:

Cup and handle are bullish continuation patterns where an upward trend has paused but will continue when the way is confirmed. The "cup" portion of the price pattern should be a rounding bottom or "U" shape rather than a sharp "V" shape with equal highs on both sides of the cup or rounding bottom.

The "handle" part of the pattern forms on the right side of the "cup" as a short pullback that looks just like a flag or pennant. As the handle formation completes, the price should rise to new highs and resume higher.

Flag patterns:

Flag patterns are continuation patterns visible using two parallel trend lines that can slope up, down, or sideways (horizontal). Typically, the flag's formation has declining volume, which recovers as the price breaks out of the flag formation.

Pennant patterns:

Pennants or triangles are also continuation patterns visible by drawing two trend lines that eventually converge. The trendlines move in two directions; one will be a down trendline and the other an up trendline. The volume will often decrease during the formation of the pennant, followed by an increase when the price eventually breaks out.

Symmetrical Triangle:

Symmetrical triangles form when two trend lines converge toward each other and signal that a breakout is likely to happen. There is no upward or downward trend. The breakouts or breakdowns are typically the same as the height of the left vertical side of the triangle.

Descending Triangle:

The descending triangle indicates that demand is decreasing, and the upper trend line suggests a breakdown is likely to occur. An ascending triangle is just the opposite of a descending triangle.

Reversal patterns:

Reversal price patterns signal a change in the prevailing trend. Reversal patterns indicate periods where the uptrend or the downtrend is nearing completion. The current trend will pause, then head in a new direction as a new interest emerges from the other side (bull or bear).

Head and Shoulders:

The Head and Shoulders (H&S) pattern is a reversal pattern that can appear at the tops or bottoms in three pushes. The initial peak or shoulder is followed by a second and larger one, the head, and then a third push that mimics the first shoulder.

Horizontal or sloped trendlines can be drawn, connecting the peaks between the head and shoulders, as shown in the chart, and are known as the neckline. Volume may decline when the pattern develops and rise back as the price rises above (in the case of an H&S bottom) or down (in the case of an H&S top) the trendline.

Double Top:

The double top or double bottom is also a reversal pattern, signalling areas where the market has failed to break through a support or resistance level.

A double top often looks like the letter M and is an initial push-up of price to a resistance level followed by a second failed attempt, resulting in a trend reversal.

Double Bottom:

A double bottom looks like a W formation and forms when the price action pushes to a support level, is denied, and makes a second attempt to breach the support level. This often results in a trend reversal.

Triple Tops and Bottoms:

Triple tops and bottoms aren't as standard as head and shoulders, double tops, or double bottom formations. These formations act very similar and can signal that a trend reversal is imminent. These price patterns are formed when the price action tests the same support or resistance level three times and cannot break through.

The double bottom occurs when there are two troughs at the same height, indicating that sellers are weaker than they were.

Pro Tip: patterns are fractal in nature, so they can be found in any charting time frame.