In this guide you will learn the various stock chart patterns that will dramatically transform your trading and investing journey in the stock market.
By the end of this guide you will:
Be able to spot a bottom in stocks
Be able to buy stocks as they bottom and move higher
Know when a stock is about to breakout higher
Know when the stock market is going to move higher
Improve your trading results
In the world of trading the stock market you need tools to help you navigate the markets. One of these tools is chart patterns.
Chart Patterns Are The Footprints Of Money
Everyday millions of traders and investors make decisions to buy or sell a stock. A trader in New York decides to buy 300,000 shares of a company. The moment it goes through, the volume is printed on the charts.
Collectively, the actions of different market participants are recorded and together they will make a single bar or single candlestick in the stock chart.
Why Learn & Use Chart Patterns
Let me just give you a short preview of why one should learn and use chart patterns.
Later I will go into detail into each point in a little more detail. When you understand each point it will dramatically improve your confidence and performance in the stock market.
But for now here are the reasons why you should learn and use chart patterns.
To time the markets
To time your entry and exits
To predict what might happen
To set a target
To profit in bull market and bear market
To save time reading all company reports
To spot "big whale" moves
To complement fundamental analysis and give you confidence
You Can Use Chart Patterns Across Different Markets : Stock Market, Forex, Commodities & Cryptos
Once you master a chart pattern guess what?
You can analyze and trade any kinds of market.
Of course there will be subtle differences and nuances in different markets such as the stock market and forex.
But the chart patterns that appear in the stock market also appears in the forex market. The cup with handle chart pattern that appears in the stock market also appears in the forex market.
The reason is these chart patterns are made up collectively by humans. And humans trade the stock market as well as the forex market.
So what works in one market will also work in another market.
What Chart Patterns Are The Best?
There are no best chart patterns unfortunately. The goal of you learning as much as you can about chart patterns is like a doctor learning about the anatomy of the human body in medical school.
Then the doctor specializes and make lots of money in that area.
In the same way, you should learn about chart patterns but the best chart patterns are the ones that you specialize in. You should choose one or two chart pattern.
Live it, study it and only trade this chart pattern.
Soon you will be a world champion at this pattern and that is all you need to make money in the stock market.
The Types Of Chart Patterns
I know you are probably impatient to get into the different chart patterns but before we go into it let me show you the 3 types of chart patterns that I have discovered.
They are the
Continuation Pattern
Reversal Pattern
Non Directional (Either Way) Pattern
A continuation pattern is where the appearance of the chart pattern will help the stock continue to move in the direction of the previous move.
So for example if the stock went up from $5 to $10 and you see a continuation pattern, then it is very likely that the stock will continue to move up.
A reversal pattern is a pattern that warns us that the stock is about to reverse direction.
So for example if the stock went up from $5 to $10 and you see a bearish reversal chart pattern, then you have to be careful as the stock can decline.
The non directional pattern is where the stock can go either way after the appearance of the pattern.
We have to use other technical indicators to help us know where they are most likely to go.
With that in mind, let us now begin and jump into the individual patterns
Bullish Reversal Chart Patterns
In reality I will actually be showing you "how to pick a bottom in stocks". So get ready for this mind blowing lesson.
Once you learn these bullish reversal chart patterns, you are ready to buy low and sell high.
If you always wonder how the professional traders come in early and scoop up stocks, then this is your opportunity to learn to be like them.
By the way, once you learn these chart patterns, you will also be able to pick the bottom of the stock market.
Bullish reversal chart patterns allow you to scoop up stocks of a company before they shoot higher
75% of stocks move with the general markets.
If you are able to pick the bottom of a crash or correction, you are very well positioned to make money in lots and lots of stocks.
Below are the bullish reversal chart patterns that I will be showing you:
The Double Bottom Chart Pattern
The double bottom chart pattern is a bullish reversal chart pattern that looks like a "W".
The stock makes a low and then makes a second low that is about the same area of the previous low.
Sometimes the second low may be slightly higher or slightly lower than the first low but that's alright as long as there is not too much difference.
How to trade the double bottom chart pattern:
Look for the stock to develop two lows that are about the same
Once you are certain there is a double bottom buy the stock when it trades above the highs of the middle
Put a stop loss below the entire chart pattern
To get an initial target, take the lows of the double bottom to the highs of the middle and project it upwards from the middle of the pattern
A double bottom appeared in the daily chart of ABNB above. The stock was drifting lower from March to May.
A nasty gap down made things worse but surprisingly the stock formed a double bottom. This gave traders a signal that the stock has strength and wanted to go higher.
There are two ways you can trade the double bottom. You can either buy the stock when it trades above the high of the middle or you can do an aggressive buy as the stock forms the second low.
This is an advance technique to buy the stock and usually you will need to pair it with some bullish divergence.
Another example of the double bottom is the chart of AMD above. The stock formed a double bottom near the rising 200 MA and look how far the stock went up.
Again, you can buy the stock near the second low for a very aggressive trade or for a more conservative trade you can buy the stock when it trades above the highs of the middle.
The great thing about the double bottom chart pattern is it can provide a target for your trade.
Many chart patterns that I will teach you here also provide you with a price target.
That is one of the great things about trading chart patterns. You know when to enter and exit and be realistic with your trade.
How do we set a target for the double bottom?
It is very easy.
Just take the height of the entire pattern and project it upwards from the top of the pattern. That will be an initial target but you will often find the stock moving higher after that.
One way is to take 1/2 of the profits off the table and let the other 1/2 of your positions run.
Once the initial target has been met, raise your stop loss to your purchase price (breakeven) for a free trade.
The Triple Bottom Chart Pattern
The triple bottom chart pattern is closely related to the double bottom. Instead of two lows, the stock makes 3 lows.
The triple bottom chart pattern can often hint of a bullish reversal in the stock.
The 1st, 2nd and 3rd lows are at about the same area.
The psychology behind this chart pattern is very interesting. What happened there was the stock tried multiple times to move lower only to be met with a wall of demand.
Demand pushes the stock up after the 3rd low and this can often be the start of a new uptrend in the stock.
Which is why it can be very profitable to trade this stock chart pattern.
How to trade the triple bottom chart pattern:
Once you have confirmed that the triple bottom chart pattern exists in the stock, buy the stock when it trades above the neckline
Put a stop loss below the entire chart pattern
Take the lows of the pattern to the neckline and project it upwards from the neckline to get an initial target
If the stock is starting an uptrend, the stock can move much higher than the initial target
Baker Hughes had a nasty correction but as it bottomed, it formed a triple bottom. Notice the lows are almost the same.
After the appearance of the triple bottom, the stock rose by quite a lot.
It helped that the stock was finding support at the 200 day moving average as the triple bottom chart pattern formed.
A trader can buy the stock when it trades above the highs of the middle.
Notice how the stock broke above a downtrend line as well. This is actually quite bullish which is why the stock rose higher.
You can set a target for this pattern by taking the height of the pattern and project it upwards.
Since this stock was just in the beginnings of an uptrend it could move way higher than the initial target.
The Inverse Head And Shoulders Pattern
The inverse head and shoulders pattern is a bullish reversal chart pattern. When you see this chart pattern appear in the stock, you should start to be bullish.
The inverse head and shoulders chart pattern starts with the stock declining to form a left shoulder. The stock then rises to the neckline and corrects again making a lower low.
This lower low forms the head. Subsequently the stock moves back up to the neckline but declines again to form the right shoulder.
The right shoulder is at the same area as the left shoulder. Eventually the stock reverses back up again and break out of the neckline.
You can draw a trendline to combine the two peaks together to form a neckline.
A trader can buy the breakout above the neckline.
The inverse head and shoulders pattern also comes with a price target. Take the height from the head to the neckline and project it upwards from the neckline breakout to get a 1st target.
Sometimes the stock can go higher after the 1st target so you should take that into consideration. Perhaps you can sell 1/2 of your position and keep the other 1/2.
How to trade the inverse head and shoulders pattern:
There should be two lows that form the right and left shoulder and a low that forms the head
Once the pattern is established, buy the stock the moment it breaks above the neckline
You can put a stop loss below the entire chart pattern. If you are a more aggressive trader you can put the stop loss below the right shoulder
To get a target take the height of the head to the neckline and project it upwards from the neckline. That is the initial target.
If the stock just started a new uptrend, it could go way higher than the initial target
Sell 1/2 or 1/3 of the stock once the initial target is met and ride the remaining positions higher
Raise the stop loss to breakeven (entry price) once the initial target is met. That way you have a free trade.
Haliburton formed an inverse head and shoulders chart pattern. Notice how the left shoulder and right shoulder is about the same area while the head is a bit lower.
A trader who spotted the inverse head and shoulder in this stock can buy the stock once it breaks above the neckline.
Notice how the stock also broke above a daily downtrend line.
This is a bullish phenomenon. Together with the inverse head and shoulders pattern, it helped to send the stock higher significantly.
The trader can set an initial target by taking the height of the head to the neckline and project it upwards from the neckline breakout.
In this case, Haliburton was able to move higher than the initial target.
So if you are trading this stock you could sell 1/3 as it hits the initial target and ride the other 2/3 higher.
Raise the stop loss to breakeven once the initial target is met.
This is proper trade management.
If you catch the inverse head and shoulders correctly you can often find the stock move significantly higher than the initial target.
The Cup With Handle Chart Pattern
The cup with handle is a bullish reversal chart pattern that appears in many winning stocks before they move up higher.
This pattern was popularized by investing legend William O' Neil who wrote the book How To Make Money In Stocks. He is also the founder of Investors Business Daily.
O' Neil discovered that many of the biggest winners in the past have one characteristic in common. They all have the cup with handle pattern before they shot up higher.
Therefore, it is also important for us to pay attention to this chart pattern and give it the study it deserves.
Who knows, you might find the next Apple or Google or Facebook with this chart pattern.
The cup with handle pattern really looks like a cup with a handle from a side view.
The stock drops and then levels to form a base. It trades sideways, bottoms and eventually move back up.
But after moving up it refuses to go higher but trades sideways again to form the handle of the cup.
How to trade the cup with handle pattern:
Traditionally, you buy the breakout of the handle. That is the bullish signal that the chart pattern gives you.
Put a stop loss below the handle
To get an initial target, the trader can take the height of the cup and project it upwards from the handle.
Often times the stock can go higher, so you might want to sell only 1/2 or 1/3 of your position and ride the remaining positions higher
Raise the stop loss to breakeven once the initial target is met
Hasbro formed a daily cup with handle. I think many traders saw that pattern and this caused the stock to gap up.
Your job will be to buy the stock the moment it breaks out above the handle. The initial target has been met.
Sometimes a stock can continue to move higher after meeting the initial target.
So it is a good idea to take only 1/2 of your position off the table let the other 1/2 run.
You can put a stop loss below the handle. (Stop loss 1)
Or if you are more conservative you can put a stop loss below the entire cup with handle pattern. (Stop loss 2)
A tighter stop loss will give you a better reward to risk ratio but if the stock goes back below the handle you will get stopped out faster.
This is called a whipsaw.
Personally, I think you should go with the stop loss below the handle.
That's because a strong stock will rarely drop back below the handle and it will continue to rise even higher than the initial target.
HII also formed a cup with handle pattern. The stock broke out of the handle and at this moment it has met its initial target.
A good trader might want to sell some of the position and use the rising 20 MA to ride the trend higher.
If the stock drops below the 20 MA (red line) then he or she might want to sell off more.
The Ascending Triangle Chart Pattern
The ascending triangle can be a bullish reversal chart pattern. Some textbooks will teach you that the ascending triangle is a bullish continuation pattern.
Yes it can be.
I will get to that part later. But for now I want to teach you that the ascending triangle can also be a bullish reversal chart pattern.
The ascending triangle forms by making same highs but higher lows.
As the pattern forms, the trading range becomes smaller and smaller.
This is what we call a volatility contraction pattern. Eventually price squeezes higher and breaks out.
How to trade the ascending triangle chart pattern:
A trader should buy the breakout. The moment the stock breaks above the upper trendline, you should buy the stock
Put a stop loss along the lower trendline.
Where the trader puts the stop loss depends on how risk tolerant they are.
An aggressive trader might want to put the stop loss below the first low before the breakout.
A more conservative trader might want to put a stop loss below the entire pattern.
We can get an initial target by taking the height of the pattern and project it upwards from the breakout.
INCY formed a bullish reversal ascending triangle.
The trader can buy the breakout of the ascending triangle. From the chart we can see many traders notice this pattern.
Hence the green bullish bar during the breakout.
The stock more than met its initial target and is now at the declining 200 MA. Perhaps a good idea is to sell of 2/3 of the position as the 200 MA can be a tough resistance to deal with.
The ascending triangle is really a very good chart pattern to trade.
If you want to learn more in depth about this chart pattern read my Guide Mastering the Ascending Triangle Chart Pattern for Profitable US Stock Trading.
Triangle Chart Pattern
The triangle chart pattern is a versatile chart pattern. It can be a bullish reversal chart pattern as well as a bullish continuation chart pattern.
For now, we will deal with it as a bullish reversal chart pattern.
The movement of the price pattern is a volatility contraction pattern. As the stock nears the breakout area, the trading range goes smaller and smaller.
You can connect the highs to get a descending trendline and you can connect the lows to get an ascending trendline. The two trendlines meet at the apex to form a triangle pattern.
This triangle chart pattern also gives the trader a sense of time when the stock is about to breakout higher or breakdown lower.
The triangle pattern is non directional and the trader should not assume that it will breakout higher or breakdown lower.
We have to see which direction it breaks and then only act accordingly.
If you are a good trader you can use other technical concepts to help you determine which direction the stock will break.
For example if you see a triangle forming at a support area, then it is most likely to breakout higher.
How to trade the triangle chart pattern:
The trader should buy the stock the moment it breaks above the upper trendline.
A stop loss can be put along the trendline. The more aggressive you are as a trader the closer you can put the stop loss.
For more conservative traders, you can put the stop loss below the entire pattern.
To get an initial target, you can project the height of the pattern upwards from the breakout area.
If the stock starts a new uptrend, it can go way higher than the initial target
All the above explanation might not make sense to you without some examples.
So let's jump right into and example.
MAA was in a downtrend and it formed a triangle chart pattern.
The stock broke out of the pattern and met its initial target.
Those who traded this stock could have took 2/3 of their positions off the table in light of the declining 200 MA above.
The yellow line is the declining 200 MA. If you didn't know, the 200 MA is a strong resistance.
A stop loss can be put below the lower trendline.
The more risk tolerant the trader is, the closer the stop loss will be to the entry point. For the conservative trader, you can put the stop loss below the entire triangle chart pattern.
MLM is a good example where the triangle pattern formed a bottom and the stock rose magnificently after that.
One of the reasons it did so well was because the stock was trading at the 200 MA and hugging it while the triangle pattern was forming.
This is an advance chart knowledge which I teach.
While we may not have the time to go in depth to why a stock that is hovering near the 200 MA can make such giant moves, just accept the fact that the presence of a flat 200 MA at the chart pattern does wonders for it.
The trader can buy the breakout and put a stop loss along the trendline depending on how aggressive he or she is.
The conservative trader can put a stop loss below the entire chart pattern.
The stock very quickly met its first target. But from what I teach, you can hold this stock a bit longer even if the target is met.
The trader can sell 1/3 of their position to book profits.
With regards to the other position you can use the rising 50 MA as a trend following tool. Stay bullish on the stock and only sell the stock when it goes back below the 50 MA.
The reason is this.
A stock that is strong will hardly drop below the 50 MA until it gives you a nice return on your trade.
Another thing to take note of is this.
This is an uncommon knowledge but try to remember it. A strong stock that breaks out of a triangle chart pattern will never drop below the apex of the triangle.
Monster stocks with bullish moves seldom drop back once it breaks out.
Try to look at the many examples of triangle breakouts yourself and you will understand what I mean.
The Rounding Bottom Chart Pattern
The rounding bottom chart pattern is a bullish reversal chart pattern that often appears when the stock is bottoming.
When you see the appearance of this chart pattern, we can often see the stock bottoming and starting a stage 2 bullish uptrend soon.
This is how the rounded bottom chart pattern looks like.
The stock has a previous downtrend and then the selling pressure dissipates. The price movement becomes less sharp to the downside and the stock forms a rounded bottom.
How to trade the rounding bottom chart pattern:
Traders can buy the breakout above a consolidation that is formed during the rounding bottom formation.
A stop loss can be placed at the bottom of the entire chart pattern.
Take the height of the entire consolidation and project it upwards from the breakout to get an initial target
If the stock starts an uptrend, then it can go higher than the initial target
MHK was in a stage 4 downtrend and the selling pressure was strong until it went back above the 20 MA (red line).
As the selling pressure dissipated, the stock begin to make higher lows.
The stock kind of traded sideways but with an improving strength since it begins to make higher lows. This is a consolidation and the trader can buy the breakout above the entire consolidation.
The trader can put a stop loss below the entire pattern.
This is a conservative stop loss but more aggressive traders can put a stop loss below the higher lows. The more aggressive you are as a trader, the close the stop loss to the entry point.
While this may give you a better reward to risk ration you might get stopped out more.
You can take the height of the chart pattern and project it upwards from the breakout area to get an initial target. The stock more than met its initial target.
Notice how the rounded bottom acted as a stage 1 basing and when it broke out of the pattern, it started a new stage 2 uptrend.
Falling Wedge Or Bullish Wedge Chart Pattern
The falling wedge chart pattern or also known as bullish wedge pattern is a bullish reversal chart pattern that is often found when a stock is correcting in an uptrend.
This chart pattern can either be a bullish reversal chart pattern or a bullish continuation chart pattern.
It depends on which direction it breaks out of and where the chart pattern appears in the trend.
As the stock declines, it makes a lower high which you can connect to form the upper trendline. The stock will also make lower lows which you can connect to form the lower trend line.
The upper trendline will be steeper than the lower trendline.
When you connect the two lines you will get a wedge pattern.
How to trade the falling wedge chart pattern:
The trader can buy the breakout above the upper trendline for a bullish trade.
If the stock breaks below the lower trendline then the pattern is not valid and you should not take the trade.
Put a stop loss below the wedge
To get an initial target take the height of the wedge at its widest point and project it upwards from the breakout
Let's take a look at an example where a stock made not one but two falling wedge chart pattern.
It's really amazing at times but sometimes the stock can have the same pattern appearing again and again.
So it really does pay if you learn a chart pattern by heart.
The first falling wedge pattern appeared in July. Notice how the stock was declining giving stockholders a heart attack as the stock moved lower.
You can draw two trendlines and will notice a wedge pattern.
However, the stock broke below the lower trendline.
This invalidated the pattern but what was interesting is the stock quickly moved back up and broke out of the upper trendline.
A failed pattern that quickly corrects itself is an even more powerful pattern than the normal falling wedge.
This is because many people were trapped thinking the stock is about to fall only to realize that it was actually bullish.
We can take the height of the pattern when it started to form and project it upwards from the breakout to get an initial target. The stock more than met its target in the July pattern.
The stock formed another bullish wedge chart pattern in September.
Traders can buy the breakout and put a stop loss below the recent low. The stock more than met its initial target. After that look how much it rose.
A successful falling wedge trade can give a very good reward to risk.
This is because the stop loss is very tight and if it works, the stock can run up by quite a lot.
Bullish Breakaway Gap Chart Pattern
The bullish breakaway gap chart pattern is a bullish reversal chart pattern. It usually occurs at the end of a current trend.
The appearance of this gap signals a new uptrend is beginning.
The breakaway gap is a chart pattern that is quite profitable and quite bullish if you can find it.
Sometimes you will find the breakaway gap happen after the stock form other chart patterns like the ascending triangle, double bottom or triple bottom.
If that happens, you have 2 bullish chart patterns that are happening and that will increase your chance of success in the stock market.
The diagram above illustrates how the breakaway gap happens.
How to trade the bullish breakaway gap chart pattern:
The stock gaps up above a significant area like a resistance. This gap can happen because of good news or good earnings report.
Ther trader can buy the gap up and put a stop loss below the nearest swing low.
If there is another bullish reversal chart pattern that appears before the gap then your trade management should follow that of the chart pattern's trade management steps
In the chart above, PGR was in a nasty correction but it formed a breakaway gap.
The stock also broke above a downtrend line as it gaps up. See how high the stock went after that.
The trader can buy the gap up and put a stop loss at the recent swing low.
For a more conservative stop loss, the trader can put a stop loss below the entire low.
Congratulations On Learning How To Spot A Bottom In Stocks
You have just read and learned about the many different bullish reversal chart patterns that will help you to spot a bottom in stocks. You are now able to:
Spot a bottom in stocks and also the major indices
Use the knowledge of these bullish reversal chart patterns in other instruments like commodities and cryptocurrencies
Know how to buy stocks as they are bottoming
Know where to put a stop loss
Know how be realistic and set profit targets for your trade
Know how to make money in the stock market
I hope the knowledge in this guide has open your eyes to the many possibilities in buying stocks before they move higher.
If you are new, I hope that this provides you a stepping stone for further studies.
Feel free to share this guide with those you think will benefit from it. Read this guide again and again if you need to and make the knowledge yours.