3.17 Price patterns, that every trader should know

Knowledge of price patterns is crucial for every trader, as they help forecast future price movements and make better investment decisions. Here are the most important price patterns that every trader should know:

Trend reversal patterns: 

 

• Head and Shoulders

• Inverse Head and Shoulders 

• Double Top 

• Double Bottom

• Triple top 

• Triple bottom 

 

Trend continuation patterns: 

 

• Flag 

• Pennant

• Rectangle

• Ascending Triangle

• Descending triangle

• Symmetrical Triangle

 

Consolidation patterns: 

 

• Rising Wedge

• Falling Wedge 

• Rhombus formation

Below we will take a detailed look at each of the price patterns.

 

Trend reversal patterns

"Head and Shoulders" formation

The "Head and Shoulders" (Head and Shoulders) formation is one of the most important and well-known trend reversal patterns in technical analysis. It is a pattern that suggests that the current uptrend is coming to an end and the market is preparing for a decline. Recognizing this formation can help investors make appropriate decisions such as selling assets or opening short positions.

Formation Structure The "Head and Shoulders" formation consists of three main parts:

1. Left Shoulder

2. Head

3. Right Shoulder
    

Stages of Formation

1. Left shoulder:

   • The price of an asset rises, reaching a peak, and then falls, forming the first bottom.

2. Head:

   • The price rises again, exceeding the height of the left shoulder, forming a higher peak (head). It then falls, reaching a level similar to the earlier low.

3. Right shoulder:

   • The price rises again, but this time it reaches a peak lower than the head, close to the height of the left shoulder. It then falls once again.

Neckline

• The neckline is a horizontal or slightly sloping line that connects the two pits formed between the shoulders and the head. Breaking this line downward is a key signal confirming the formation and suggesting that the trend is changing to downward.

 

Example: Imagine that you are analyzing the price chart of bitcoin (BTC). Seeing on the price chart a formation consisting of:

• A first peak (left shoulder) at $45,000, after which the price falls to $42,000.

• A second, higher peak (head) at $50,000, after which the price falls again to $42,000.

• A third peak (right shoulder) at the $45,000 level, after which the price falls again to $42,000.

When the price breaks the $42,000 level (neckline) and falls below this level, the "Head and Shoulders" formation is confirmed, suggesting further price declines.

Significance of the Formation The "Head and Shoulders" formation is an indicator of the change from an upward trend to a downward one. It is particularly important for investors because it signals that they may consider selling their assets to avoid losses from upcoming price declines.

Summary The "Head and Shoulders" formation is a key tool in every trader's arsenal to help identify the end of an uptrend and the beginning of a potential downtrend. Recognizing this formation on a price chart can help you make more informed investment decisions.

 

Inverse Head and Shoulders Formation 

The Inverted Head and Shoulders price formation is a key trend reversal pattern in technical analysis, signaling the end of a downtrend and the beginning of a potential uptrend. Recognizing this formation can help investors make decisions to buy assets in anticipation of a potential price rise.

Formation Structure The "Inverted Head and Shoulders" formation consists of three main parts:

1. Left Shoulder

2. Head

3. Right Shoulder

Stages of Formation

1. Left shoulder:

   • The price of an asset falls, reaching a bottom, and then rises, forming the first peak.

2. Head:

   • The price falls again, crossing the level of the bottom of the left shoulder, forming a lower low (head). It then rises, reaching a level similar to the earlier peak.

3. Right shoulder:

   • The price falls again, but this time it reaches a bottom higher than the head, close to the level of the left shoulder. It then rises once again.

Neckline 

• The neckline is a horizontal or slightly sloping line that connects the two peaks formed between the shoulders and the head. An upward break of this line is a key signal confirming the formation and suggesting that the trend is changing to an upward one.

 

Example Imagine that you are analyzing the price chart of Ethereum (ETH). On the price chart you see a formation consisting of:

• A first bottom (left shoulder) at the $2,500 level, after which the price rises to $2,700.

• The second, lower low (head) at the $2,000 level, after which the price rises again to $2,700.

• The third low (right shoulder) at the $2,500 level, after which the price rises again to $2,700.

When the price breaks the $2,700 level (neckline) and rises above this level, the "Inverted Head and Shoulders" formation is confirmed, suggesting further price increases.

Significance of the Formation The "Inverted Head and Shoulders" formation is an indicator of the change in trend from downward to upward. It is particularly important for investors because it signals that they may consider buying assets to take advantage of potential price increases.

Summary The "Inverted Head and Shoulders" formation is a key tool in every trader's arsenal to help identify the end of a downtrend and the beginning of a potential uptrend. Recognizing this formation on a price chart can help you make more informed investment decisions.

 

"Double Top" formation 

 The "Double Top" (Double Top) formation is one of the most recognizable trend reversal patterns in technical analysis. It indicates the possibility of the end of an uptrend and the beginning of a downtrend. It is particularly useful for investors who want to identify moments to consider selling their assets.

Structure of the Formation The "Double Top" formation consists of two main parts:

1. First Top

2. Second Top

Stages of Formation

1. First high:

   • The price of an asset rises, reaching a high level (peak), then falls, forming a local bottom.

2. Second high:

   • The price rises again, reaching a level close to the first high, but does not exceed it. The price then falls again, forming a second local low.

Support line (Neckline)

• The support line is a horizontal line that connects the two bottoms formed between the highs. Breaking this line downward is a key signal confirming the formation and suggesting that the up trend is changing to a down trend.

• 

Example Imagine that you are analyzing the price chart of bitcoin (BTC). On the price chart you see a formation consisting of:

• A first high at $60,000, after which the price falls to $55,000.

• A second high at the $60,000 level, after which the price falls again to $55,000.

When the price breaks the $55,000 level (support line) and falls below this level, the "Double Top" formation is confirmed, suggesting further price declines.

Significance of the Formation The "Double Top" formation is an indicator of a change in trend from upward to downward. It is important for investors because it signals that they may consider selling assets to avoid losses from price declines.

Summary The "Double Peak" formation is a key tool in every trader's arsenal to help identify the end of an uptrend and the beginning of a potential downtrend. Recognizing this formation on a price chart can help you make more informed investment decisions.

 

"Double Bottom" formation 

The "Double Bottom" (Double Bottom) formation is one of the basic trend reversal patterns in technical analysis. It indicates the possibility of the end of a downtrend and the beginning of an uptrend. It is important for traders who are looking for signals of potential buying points for assets after a period of price declines.

Formation Structure The "Double Bottom" formation consists of two main parts:

1. First Bottom

2. Second Bottom

Stages of Formation

1. First bottom:

   • The price of an asset falls to a certain level (bottom), after which it begins to rise.

2. Second bottom:

   • After the first rise, the price falls again, reaching a level close to or equal to the first bottom, and then begins to rise again.

Resistance line (Neckline)

• The resistance line is a horizontal line connecting the two peaks that occur between the bottoms of the formation. Breaking this line upward is a key signal confirming the formation and suggesting that the trend may change to an upward one.

Example Imagine that you are analyzing the price chart of Ethereum (ETH). On the chart you see a "Double Bottom" formation:

• The first bottom reached $1,800, after which the price began to rise.

• The second bottom reached a similar level to $1,800, after which the price began to rise again.

When the price breaks through the resistance level that connects the peaks of the formation, the "Double Bottom" formation is confirmed, suggesting further price growth.

 

Significance of the Formation The "Double Bottom" formation is an indicator of a change in trend from a downtrend to an uptrend. It is important for traders and investors because it signals a potential place to buy assets after a period of price declines.

Summary The "Double Bottom" formation is a key tool in technical analysis to help identify potential buying points after a period of price declines. Recognizing this formation on a price chart can help investors make more informed investment decisions.

 

Triple Top formation

The "Triple Top" (Triple Top) formation is one of the more advanced trend reversal patterns in technical analysis. It indicates the possibility of the end of an uptrend and the beginning of a downtrend. It is important for traders who want to identify moments when to consider selling assets.

Structure of the Formation The "Triple Top" formation consists of three major tops (peaks) which are quite close to each other and form a resistance level on the price chart.

Stages of Formation Creation

1. First top:

   • The price of an asset rises to a certain level (top), after which it falls.

2. Second to:

   • The price rises again, reaching a level close to or equal to the first top, and then falls.

3. Third top:

   • The price rises again, reaching levels close to but not exceeding the first two tops. The price then falls.

Support line (Neckline)

• A support line is a horizontal line that connects the lows between the peaks. Breaking this line downward is a key signal confirming the formation and suggesting that the up trend is changing to a down trend.

Example Imagine that you are analyzing the price chart of the stock of XYZ company. On the chart you see a "Triple Top" formation:

• Three peaks reached the $100 level, but failed to exceed it. After each peak, the price fell, forming local lows at the $90 level.

When the price breaks the $90 level (support line) downward, the "Triple Top" formation is confirmed, suggesting further price declines.

 

Significance of the Formation The "Triple Top" formation is a strong indicator of the change in trend from upward to downward. It is important for traders because it signals a potential place to sell assets before expected price declines.

Summary The "Triple Top" formation is an advanced tool in technical analysis that helps identify potential selling points before expected price declines. Recognizing this formation on the price chart can help investors make more informed investment decisions.

 

"Triple Bottom" formation

The "Triple Bottom" (Triple Bottom) formation is one of the basic trend reversal patterns in technical analysis. It indicates the possibility of the end of a downtrend and the beginning of an uptrend. It is important for traders who are looking for signals of potential buying points for assets after a period of price declines.

Structure of the Formation The "Triple Bottom" formation consists of three main parts:

1. First Bottom

2. Second Bottom

3. Third Bottom

Stages of Formation

1. First bottom:

   • The price of an asset falls to a certain level (bottom), after which it begins to rise.

2. Second bottom:

   • After the first rise, the price falls again, reaching a level close to or equal to the first bottom, and then begins to rise.

3. Third bottom:

   • The price falls again, reaching levels close to but not exceeding the previous two bottoms. The price then begins to rise.

 

Resistance line (Neckline)

• The resistance line is a horizontal line connecting the peaks that occur between the bottoms of the formation. Breaking this line upward is a key signal confirming the formation and suggesting that the trend may change to an upward one.

Example Imagine that you are analyzing the price chart of bitcoin (BTC). On the chart you see a "Triple Bottom" formation:

• The first bottom reached the $30,000 level, after which the price began to rise.

• The second bottom reached a similar level to $30,000, and then the price began to rise again.

• The third bottom reached a similar level to the previous two, and then the price began to rise.

When the price breaks through the resistance level that connects the peaks of the formation, the "Triple Bottom" formation is confirmed, suggesting a further rise in price .

Significance of the Formation The "Triple Bottom" formation is an indicator of the change in trend from falling to rising. It is important for traders and investors because it signals a potential place to buy assets after a period of price declines.

Summary The "Triple Bottom" formation is a key tool in technical analysis to help identify potential buying points after a period of price declines. Recognizing this formation on the price chart can help investors make more informed investment decisions.

 

 

Trend continuation patterns
 

Flag Formation (Flag Pattern)

The Flag Formation is one of the popular continuation patterns in technical analysis of financial markets. It occurs after a dynamic price movement and usually signals that the price will continue the trend that occurred before the formation.

Formation Structure: The Flag Formation consists of two main elements:

1. Mast: This is the first price movement, which is a dynamic and strong movement in one direction.

2. Flag: At the mast, the price begins to form a correction, which can be in the form of a rectangle or triangle, moving against the main trend.

Types of Flags:

• Rectangular Flag: It is characterized by a rectangular shape, where the price moves in a narrow range, forming a correction after a dynamic price movement.

• Triangular Flag: Can take the form of a triangle, where the upper downtrend line and the lower uptrend line combine to form a correction.

 

Meaning of Formation: Flag formation is seen as a sign that the price, after a short correction, is ready to continue the main trend. Breaking the upper flag line (for an uptrend) or the lower flag line (for a downtrend) can be a signal to enter the market in the direction of the trend.

Example: Imagine that you are observing  the price chart of Ether (ETH). After a dynamic rise, the price has begun to form a rectangular flag. When the price breaks the upper line of this upward flag, it is a signal that the upward trend may continue.

Summary: The Flag Formation is an important tool in technical analysis, allowing traders to identify moments when the price may continue the trend after a short-term correction. Being able to recognize and interpret this formation can help you make more informed investment decisions.

 

Pennant Pattern

The Pennant Pattern is a trend continuation pattern that occurs after a dynamic price movement. It is similar to the Flag Formation, but is characterized by a more triangular shape, reflecting a rapidly narrowing price range.

Formation Structure: The Flag Formation consists of two key elements:

1. Mast: The first price movement, which is a dynamic and strong movement in one direction (upward or downward).

2. Ensign: After the mast, the price begins to form a triangular formation that tapers upward or downward, depending on the direction of the main trend.

Types of Ensigns:

• Rising Ensign: Occurs after a price rise. The upper downward trend line and the lower upward trend line combine to form a triangle formation.

• Declining Pennant: After prices fall, the lower uptrend line and the upper downtrend line merge, also forming a triangle formation.

 

Meaning of Formation: The pennant formation signals a temporary respite after a dynamic price movement, during which the price consolidates in a triangular shape. Breaking the upper pennant line (in the case of an uptrend) or the lower pennant line (in the case of a downtrend) may indicate a continuation of the main trend.

Example: Let's look at the situation in the stock market, where after a sharp rise, the price consolidates in the form of an upward pennant. When the price breaks the upper line of this upward pennant, it may be a signal for further price increases.

Summary: The pennant formation is an important tool in technical analysis, allowing traders to identify moments when the price may continue the trend after a short-term consolidation. Recognizing this formation allows you to make better reasoned investment decisions based on observation of price behavior and market trends.

 

Triangle Formation (Triangle Pattern)

The Triangle Formation is one of the key price patterns in technical analysis of financial markets. It is characterized by a gradual narrowing of the price range, which can indicate an impending break of the trend.

Formation Structure: Triangle formation can take three main forms, depending on the direction of the trend before its formation:

1. Ascending Triangle: The lower upward trend line is horizontal, and the upper downward trend line is gradually rising.

2. Descending Triangle: The upper downward trend line is horizontal, and the lower upward trend line is gradually falling.

3. Symmetrical Triangle: Both the upper downward trend line and the lower upward trend line combine to form a triangular formation.

 

Meaning of Formation: Triangle formation indicates a gradual tightening of the price range, which is usually interpreted as a sign of an impending trend break. Breaking the upper line of the triangle (upward or symmetrical) or the lower line of the  triangle (downward or symmetrical) can signal further price movement toward the breakout.

Example: Consider the example of the cryptocurrency market, where the price forms a symmetrical triangle after a dynamic rise. When the price breaks the upper line of the symmetrical triangle, it can be a signal for further price increases.

Summary: Triangle formation is an important tool in technical analysis, helping traders and investors to identify potential turning points in the market. Recognizing different types of triangles and skillfully interpreting them can significantly aid investment decisions based on analysis of price patterns and market behavior.

 

Rectangle Pattern Formation.

The Rectangle Formation is one of the key trend continuation patterns in technical analysis of financial markets. It is characterized by horizontal lines of support and resistance that form a rectangular price consolidation.

Formation Structure: The Rectangle Formation consists of two main elements:

• Support Line: Levels at which the price regularly finds support and does not go below.

• Resistance Line: Levels where the price regularly finds resistance and does not go below.

 

Meaning of Formation: The Rectangle Formation suggests a period of price consolidation, where bid and demand are relatively balanced. When the price approaches the resistance line, there is a possibility of a continuation of the uptrend after breaking through the line. Similarly, approaching the support line may lead to the continuation of the downtrend after piercing this level.

Example: Using the stock market as an example, the Rectangle formation can be seen after a dynamic price rise, after which the price begins to oscillate between support and resistance levels. After breaking through the resistance line, investors can expect further price increases.

Summary: The Rectangle formation is an important technical analysis tool to help traders and investors identify potential turning points in the market. Recognizing this formation can be useful for both making decisions on opening positions and managing risk by setting appropriate stop loss and take profit levels.

 

Consolidation patterns

Rising Wedge Formation (Rising Wedge)

Description: The Rising Wedge Formation (Rising Wedge) is one of the consolidation patterns in technical analysis of financial markets. It is characterized by sloping lines of support and resistance that taper in the opposite direction to the main trend.

Formation Structure: An Ascending Wedge consists of two trend lines:

• Resistance Line: The level to which the price regularly approaches while forming successive higher peaks.

• Support Line: The level to which the price is also approaching but forming successively higher lows at the same time.

Meaning of Formation: The Rising Wedge Formation is usually interpreted as a signal of a potential reversal of a downtrend into an uptrend. Although the name suggests a rise (rising), this formation often leads to a decline in prices after it breaks down below the support line.

 

Example: Using the cryptocurrency market as an example, an ascending wedge can occur after a period of growth, when the price begins to form higher peaks and higher lows. Once the support line is pierced, investors can expect the price to fall further.

Summary: The Rising Wedge formation is an important technical analysis tool to help traders and investors identify potential trend changes in the market. Recognizing this formation can be useful for making decisions on opening positions and managing risk by setting appropriate stop loss and take profit levels.

 

Falling Wedge Formation

The Falling Wedge formation is one of the consolidation patterns in technical analysis of financial markets. It is characterized by sloping lines of support and resistance that taper in the opposite direction to the main trend.

Formation Structure: The Falling Wedge consists of two trend lines:

• Resistance Line (Resistance Line): The level to which the price regularly approaches, while forming successive lower peaks.

• Support Line: The level to which the price is also approaching, while forming successive lower lows.

Meaning of Formation: The Falling Wedge Formation is usually interpreted as a signal of a potential reversal of an uptrend into a downtrend. Although the name suggests a decline (falling), the formation often leads to an upward price rise after it breaks above the resistance line.

Example: Using the cryptocurrency market as an example, a Falling Wedge can occur after a period of declines, when the price begins to form lower peaks and lower lows. Once the resistance line is pierced, investors can expect further price increases.

Summary: The Falling Wedge formation is an important technical analysis tool to help traders and investors identify potential trend changes in the market. Recognizing this pattern can be useful for making decisions on opening positions and managing risk by setting appropriate stop loss and take profit levels.

 

Rhombus Formation (Diamond Pattern)

The Rhomb Formation (Diamond Pattern) is one of the consolidation patternsformations in technical analysis, which is formed by the appearance of tapering trend lines, forming a diamond or rhombus-like structure.

Formation Structure: The Rhombus Formation consists of two trend lines:

• Upper Trendline: Formed by levels to which the price regularly approaches, forming successive lower peaks.

• Lower Trendline : A level to which the price also approaches, while forming successive higher lows.

 

Meaning of Formation: The Rhombus formation is usually interpreted as a signal of price consolidation after an intense price movement. It can indicate a potential weakening of the preceding trend and a possible price breakthrough in the future, but the rhombus shape itself does not clearly indicate whether there will be an increase or decrease in prices.

Example: Using the stock market as an example, the Rhombus Formation can appear after a period of ups or downs, when the price begins to form a narrowing price area. Investors can expect further price consolidation before a potential upward or downward breakout.

Summary: The Rombus formation is a technical analysis tool that can help traders and investors identify periods of price consolidation and potential turning points in the market. Recognizing this formation can be useful for making decisions on opening positions and managing risk by setting appropriate stop loss and take profit levels.