Essential Stock Chart Patterns for Traders That You Can't Afford to Forget

Whenever deciding whether to invest in a stock, the first step of your research starts with observing how well it did historically. The graphical representation of this historical performance can be seen on a chart. Now, every performance chart has its ups and downs, but what if some of these patterns repeat on a regular basis? Is there a lesson to be learned here? As a matter of fact, there just might be.

Now, keep in mind that stock chart patterns are there to show what happened but not why it happened. In other words, if the story of a company behind the stock has a different development, it definitely won’t mimic the chart pattern that it started out with. However, the same factors often give the same results. With that in mind and without further ado, here are some of the most common stock chart patterns for traders that you should definitely memorize.

Basic Terminology

Before we carry on, it’s important to explain that there are two types of patterns (based on the personality of the investor). You see, bullish investors, act due to the belief that the value will rise, while bearish investors believe the opposite. This is why patterns and trends are often described as either bullish or bearish.

The resistance level is an imaginary cap past which the value of the stock will continue growing or falling unrestricted. The point at which this resistance level is breached is referred to as the breakout point. Now, in accordance with what we’ve previously talked about, a breakout can be either bullish or bearish.

While all of this is quite oversimplified, data visualization is incredibly important in a lot of fields. The investment field is no exception here.

Ascending Triangle

This is happening with stocks that have a stellar rise. It signifies the rapid climb of a certain stock, but it does so in stages. First, there’s a brief period of stagnation where the stock starts rising and then drops slightly.

While the peak is seldom surpassed, the amplitude between the daily low and daily high is getting smaller and smaller. This indicates the stabilization of the value, which is a signal to the investors that the volatility is low and that the time to invest is now. At one point, there’s a breakout point after which the value of the stock just skyrockets. Moreover, this is a bullish pattern.

Studying these seemingly simple trading chart patterns will help you understand the more complex ones later on. Moreover, every stock can have multiple patterns on the value line over the course of months and years. Understanding the mall can benefit you many times over.

Triple Bottom

This particular pattern is quite problematic, seeing as how it signifies a massive shift in the value of a certain brand. It starts with a sharp downward trend. After reaching the first bottom, there’s a sharp rise upwards. Then, you have a second shift downward and a sharp rise after the second bottom. All of this happens three times until the last rise reaches a breakout. At this point, the value keeps rising.

In other words, this is a bullish chart pattern that is characterized by three equal lows followed by the breakout above the resistance level. Moreover, the triple bottom is not only bullish but extremely bullish, seeing as how the chart shows a large amplitude (indicating volatility) and some quite extreme lows. Also, it’s a pattern that requires long-term investments in order to yield satisfactory results.

It's also worth mentioning that this pattern highly resembles the inverse head and shoulders, as well as the standard head and shoulders chart pattern. The etymology stems from the similarity to the silhouette of a person’s head, and shoulders turned upside down (or the opposite in the standard head and shoulders scenario). Everything’s the same other than the fact that the middle bottom (head) is lower than the first (left shoulder) and the third one (right shoulder).  

Descending Triangle

The descending triangle is a bearish pattern, which is one of the most common representations of a downward trend. It can be seen as a reversed upward trend, but it is not its mirror image. You see, while the bottoms are similar, the peaks have smaller and smaller amplitudes. This kills any hopes by investors that their luck will turn, which results in a sharp fall after the breakout point.

When you decide to look at the math, instead of just trying to figure it out visually, if there’s a descending triangle, in 54% of cases, there’s a bearish breakout. Still, when the bearish slant gets broken, the percentage will go up to as much as 84%. Keep in mind that we’re still talking about odds, which is why there’s no guarantee.

Rounding Bottom

While it definitely doesn’t start this way, a rounding bottom is a bullish chart pattern. It’s a bit more complex, while some would even go as far as to describe it as more chaotic. Moreover, due to its rounded bottom, there are some who refer to a rounding bottom as a “saucer bottom.”

The biggest problem with a rounding bottom is that it may last for months and years. This is what makes it a long-term investment, but it’s also one that makes a lot of people quite uncomfortable.

It’s also quite similar to the (perhaps more recognizable) cup with a handle pattern. The biggest difference lies in the fact that the cup with a handle starts off from a low value and starts declining after hitting a certain peak. Moreover, its duration is usually more predictable, seeing as how it usually lasts between 7 and 65 weeks. Needless to say, both are bullish patterns.

Flag

Speaking of complex bullish chart patterns, there’s no working around the flag. While it has some peaks and bottoms, the key characteristic is that if you were to draw one line connecting all the peaks and another connecting all the bottoms, you would get a rectangle facing downward. Then, at a certain point, there’s a breakout, after which you have a sharp rise.

The flag marks a consolidation of a market after a number of sharp moves. Compared to some other patterns, the flag doesn’t have nearly as sharp downward spirals, which is why it’s often characterized as a relatively small risk and a relatively high profit. Most importantly, the profits are expected to come relatively quickly (in a matter of weeks), which guarantees a relatively quick turnaround. In other words, relatively reliable quick profits are what you see with a flag chart pattern.

Bearish Symmetrical Triangle

Needless to say, you have both the bullish and bearish symmetrical triangle, and the way it works is as follows. If you were to draw a line between the peaks and the bottoms on the chart, they would make a symmetric triangle. Now, in order to form this triangle, it’s necessary for every next peak to be slightly lower and every next bottom to be slightly higher positioned. This indicates a false stabilization of the market, which is what fools a lot of investors.

The difference between bearish and bullish comes from the breakout point, but other than this, the pattern is fairly similar. Naturally, seeing as how we’re talking about a BEARISH triangle, the ultimate fate of the stock is not very optimistic.  

In Conclusion

One interesting thing about stock chart patterns, as well as one thing that actually makes them relevant, is the fact that you’re not the only one looking at them. Another investor (or other investors) will examine charts, and once they think that they’ve recognized a pattern, they’ll act accordingly. If they recognize an ascending triangle, they’ll rush to buy, and if they recognize a descending triangle, they’ll rush to sell. It’s a self-fulfilling prophecy, and in order to learn how to anticipate it, you need to memorize and make sure not to forget any of these patterns.