10 Chart Patterns every pro trader should know
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10 Chart Patterns every pro trader should know
Published by First Information
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All rights reserved. No part of this book may be reproduced or transmitted in any form
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any information storage and retrieval system, without the written permission of the
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rights, contact First Information at the above email address.
Copyright © 2022 Vince Stanzione.
Vince Stanzione has been trading markets for over 30 years and has shared
his knowledge and experience in a number of books. He is the New York Times
bestselling author of The Millionaire Dropout and has created the “Making Money
from Financial Spread Trading” course. He has been quoted and featured favourably
in over 200 newspapers, media outlets, and websites including CNBC, Yahoo Finance,
Marketwatch, Reuters, Independent, Sunday Independent, Observer, Guardian, The
Times, Sunday Times, Daily Express, What Investment, Growth Company Investor,
New York Times, Bullbearings, City Magazine, Canary Wharf, Institutional Investor
China, and Shares Magazine. Vince Stanzione, the author and publisher of this guide, is
a Deriv client and affiliate and may receive a commission on financial products offered
by Deriv.
He is a self-made multi-millionaire who mainly lives in Mallorca, Spain, and
trades financial markets, including currencies, stocks, and commodities. For more
information, visit www.fintrader.net and follow him on Twitter @vince_stanzione.
10 Chart Patterns every pro trader should know
CONTENTS
Chapter 01. Introduction to technical analysis 6
Why chart patterns should be considered 8
Candlestick charts 10
Popular time frames 12
Chapter 02. The 10 chart patterns you should know 13
Pattern 1 — Head and shoulder 14
Pattern 2 — Inverse head and shoulders 15
Pattern 3 — Double bottom 16
Pattern 4 — Double top 17
Pattern 5 — Cup and handle 18
Pattern 6 — Rounding top 19
Pattern 7 — Rounding bottom 20
Pattern 8 — Ascending triangle 21
Pattern 9 — Descending triangle 22
Pattern 10 — Wedges: rising and falling 23
Final words 25
Glossary 27
10 Chart Patterns every pro trader should know
CHAPTER 1
Introduction to
technical analysis
10 Chart Patterns every pro trader should know
INTRODUCTION TO TECHNICAL ANALYSIS
There are hundreds of chart formations and technical indicators. Volumes have been written on
the subject, some good and many long, confusing and contradictory. My aim here is to give you
10 chart patterns that you will encounter in everyday trading, whether you are trading stocks,
commodities, forex, synthetic indices, or cryptocurrencies2. You will find that these patterns
have historically appeared and can consider them in making your trading plan.
Chart patterns are a guide, not a guarantee
It’s important to realise that chart patterns
DISCLAIMER and technical analysis are a guide, not a guar-
antee. I would love to tell you that these chart
There is no guarantee that
patterns will work every time, but sadly they
analysing the market’s past
will not.
performance, whether on
financial or synthetic indices, The aim is to look for a trading edge,
something that helps you make a better
can lead to successfully
trading decision and, over time, might bring
predicting future market
you success in financial markets.
movements. These technical
analysis tools merely help Chart patterns also help reduce emotions in
trading, giving you a roadmap as to when to
to understand how markets
enter a trade and, more importantly, when
move and how such data
to exit. In a fast-moving market — especially
can be analysed for a better-
if a trade is moving against your prediction
informed decision when
— logic and common sense can go out of the
trading. Please remember window, so having a trading plan and being
that trading always involves aware of what pattern a market adopts can
risk, and you should really help your trading results since you’ll
consider this when trading. then be at a better position to recognise a
losing trade and let go of it.
The word market in this book can easily refer
to a forex pair, stock, index, or cryptocurrency.
2 Synthetic Indices and Cryptocurrencies are not available for clients residing in the UK.
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10 Chart Patterns every pro trader should know
Garbage in, garbage out — the importance of good data feeds
It’s worth remembering that as technical Staying with the most liquid markets such
analysis relies purely on data (numbers), your as major currencies, indices, larger cap
data feed should be clean, and you must be individual stocks, commodities (major
aware of data spikes or data issues. If the ones are oil and gold), and the major
price is 11,12,13 and then the next price is cryptocurrencies can help you avoid pricing
100, it is likely to be a data issue. The charting issues that lead to inaccurate charts.
package, in most cases, will not know, so that Good data feeds will normally correct price
is where your common sense has to take over. spikes or erroneous data, but this can
It’s also worth noting that “illiquid markets” sometimes happen hours after the event.
— those of stocks or financial products that do
not trade actively — are prone to spiking data
and unsuitable for chart pattern or technical
trading.
Example of an illiquid stock
Here we see many gaps and days when the stock does not trade. This is not a suitable stock for
using chart patterns.
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10 Chart Patterns every pro trader should know
What is technical analysis?
Technical analysis ignores the news and We would start with a basic price chart which
economic data, focusing purely on price trends would show the markets trading price in the
and volume. It primarily involves studying past, and look for a trend or pattern that could
chart patterns, showing the trading history help determine future pricing.
and statistics for whatever market is being In this guide, I am skipping over indicators
analysed. and tools such as Moving averages, RSI or
Even traders who prefer a fundamental MACD and only focusing on actual chart
analysis driven by company news, earnings, patterns.
and valuation ratios sometimes use technical Of course, technical indicators can also be
analysis afterwards to determine a good combined with chart patterns.
entry price.
Why chart patterns should be considered
A picture tells a 1,000 words
If I showed you a spreadsheet of prices in Chart patterns tend to repeat themselves
numbers, chances are you will not see a over and over again, which helps to appeal
pattern; however, if those same numbers are to human psychology and trader psychology
displayed in a chart it is far easier to make in particular. It is common to see a market
sense of what is happening in a market. move to a round number or find support at a
Chart patterns put all buying and selling that’s previous price level.
happening in a financial market into a concise Thanks to the internet, it’s now easier than
picture. It is possible to see buyers (bulls) and ever to find chart patterns. Many sites will
bears (sellers) take or lose control of a market. offer screeners which allow you to filter for
This can help you to identify a trend reversal. chart patterns. I use finviz.com
Chart patterns are a pure expression of what is As you can see, I can select major patterns and
going on in the underly market. You or I could then see all the stocks that meet that criteria.
think something is overvalued or undervalued,
but a chart pattern is purely price-driven.
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10 Chart Patterns every pro trader should know
Source: finviz.com
Here I can screen chart patterns, saving hours of manual screening.
Before diving into individual chart patterns, let’s first learn more about charts and timeframes.
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10 Chart Patterns every pro trader should know
Candlesticks charts
In the chart patterns used in this ebook, If the asset has closed higher than it opened,
we will use candlestick charts, presumably the body is white or green. The opening price
developed in the 18th century by the is at the bottom of the body. The closing price
legendary Japanese rice trader Homma is at the top. If the asset has closed lower
Munehisa. The charts gave Homma and than it opened, the body is black or red. The
others an overview of open, high, low, and opening price is at the top. The closing price
close market prices over a certain period. is at the bottom. A candlestick need not have
This method of charting prices proved to be either a body or a wick.
particularly interesting and helpful due to The most common colours — and the ones
its uncanny ability to display five data points I use — are red for a down candle and green
at a time instead of just one. Charles Dow for an up candle. White for an up candle and
picked up the method circa 1900, and today’s black for a down candle are also used, a
financial market traders still widely use it. custom that goes back to the days of printing
Candlesticks are usually composed of a body out charts in black and white.
and wick. The body, typically shaded in black/
red or white/green, illustrates the opening
and closing trades.
The wick, consisting of an upper and lower
shadow, shows the highest and lowest traded
prices during the time interval represented.
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10 Chart Patterns every pro trader should know
Here we see an example of Tesla (TSLA) using a candlestick chart where each bar represents
one day of trading, green the stock closed up and red the stock closed down. This is the raw
chart to which we can add chart patterns and indicators, as I shall explain further in the ebook.
Source: TradingView.
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10 Chart Patterns every pro trader should know
Popular time frames
Depending on what time frame you look at, 1 week is a time frame that allows you to see
the market may give contradictory buy and a longer-term pattern. Of course, it’s more
sell patterns. For example, if you look at the delayed and not as responsive, but it can
S&P500 on a 1-minute chart it will look very provide a good picture of a longer-term trend.
different to the S&P500 on a 1-day, 1-week, 1 month is a time frame that gives you a long-
or 1-month chart. term view on a market with years of data being
1 minute — very short term — is a time frame visible on a chart. One-month chart patterns
that gives many buy and sell signals. Since it often signal a serious trend change.
is oversensitive, it can lead to false signals. There are other time frames, but these tend
The advantage is that signals react to market to be the main ones I use. The examples in
moves very quickly. Therefore, there is little this ebook are based on daily charts unless
lag time. stated otherwise, but they can also be used
1 hour is a popular time frame and helps on short or longer-term charts.
reduce the oversensitivity issues of a
1-minute chart.
1 day is the most commonly used time frame
and the one I mainly use. Each candle on a
1-day chart represents a trading day. It is
suitable for those not watching a screen all
day, doesn’t have the oversensitivity of short-
term movements, and catches all major trend
changes.
12
CHAPTER 2
10 Chart patterns
you should know
10 Chart Patterns every pro trader should know
Pattern 1 - Head and Shoulders
This is one of the patterns. Its popularity is mainly attributed to the fact that it is easier to spot
than other patterns.
The head and shoulders pattern tries to predict a reversal. Characterised by a large peak with
two smaller peaks on either side, all three levels fall back to the same support level as the
neckline. The trend is then likely to break out in a downward motion.
Its name comes from what the pattern looks like: a head and two shoulders (and a neckline).
With this pattern, you would enter a short or sell trade below the neckline and a stop around
halfway between the second shoulder. The target move would be around the distance between
the head (peak) and neckline.
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10 Chart Patterns every pro trader should know
Pattern 2 - Inverse Head and Shoulders
The inverse head and shoulders or reverse bottom is a bullish pattern and indicates sellers
have been exhausted. You would enter a long trade just above the neckline and a stop towards
the recent low of the second shoulder. The target would be a continuation of the head move
giving a fairly good risk-to-reward potential.
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10 Chart Patterns every pro trader should know
Pattern 3 - Double Bottom
A double bottom looks similar to the letter W and indicates when the price has made two
unsuccessful attempts at breaking through the support level. It is a reversal chart pattern as
it highlights a trend reversal. After unsuccessfully breaking through the support twice, the
market price shifts towards an uptrend. You will also see triple bottoms play out.
Here we see the initial decline and attempt to rally, a second decline, which does not go below
the first decline, forming support. You would buy just above the neckline and stop towards the
middle of the up move, with a target at the same level that the initial decline started at.
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10 Chart Patterns every pro trader should know
Pattern 4 - Double Top
Opposite of a double bottom, a double top looks like the letter M. The trend enters a reversal
phase after failing to break through the resistance level twice. If the price fails to move higher,
then it is likely to go back to the neckline, which is support. If it fails there, it will move lower
back down to the lows of the recent move. In this type of setup, you would look to take a short
trade with a stop above the neckline, and your target would be the recent lows.
It’s worth adding that you will also find multiple bottoms (support) or tops (resistance) in
markets, so you could see a triple top or triple bottom.
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10 Chart Patterns every pro trader should know
Pattern 5 - Cup & Handle
The cup and handle is a continuation stock chart pattern that signals a bullish market trend.
It is the same as the rounding bottom or saucer (also a pattern worth looking out for) but
features a handle after the rounding bottom. The handle resembles a flag or pennant and once
completed, you can see the market breakout in a bullish upwards trend.
The handle is a temporary retracement pattern and breaks out to continue the move higher.
This pattern can be fairly rare and takes time to complete; however, the upside move can be
fairly explosive. The move-up is often the same distance as the cup height, so once the handle
completes the next move higher, it gives us a target move of the same distance as the cup.
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10 Chart Patterns every pro trader should know
Pattern 6 - Rounding Top
A rounding top usually indicates a bearish downward trend. It tends to show that the market is
losing strength with each high being lower than the previous one. We then see a move through
the neckline as support fails, then we see a smaller retest (bounce) back to the neckline before
a larger fall. The fall is normally the same distance as the recent high to the neckline. I have
often seen this pattern in cryptocurrencies such as Bitcoin.
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10 Chart Patterns every pro trader should know
Pattern 7 - Rounding Bottom
The flip side of the rounding top is the rounding bottom, which is a bullish pattern. The market
is in a downtrend but then starts to make a series of lows, higher than the previous ones, which
form the rounded bottom or saucer. We then break out of the cup and move higher.
You would look to buy around the halfway point of the formation of the U shape or once the
breakout occurs.
A rounded bottom can take weeks to form, but you can use a stock screening site to identify
a selection of stocks and markets that make this pattern and add them to your watch list. You
would only open trades once you are heading to the breakout point.
This is very similar to the cup and handle pattern previously covered.
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10 Chart Patterns every pro trader should know
Pattern 8 - Ascending Triangle
The ascending triangle is a bilateral pattern meaning that the price could break out from either
side. A breakout is likely where the triangle lines converge. To draw this pattern, you need to
place a horizontal line (the resistance line) on the resistance points and draw an ascending line
(the uptrend line) along the support points. This pattern shows the price moving into smaller
and smaller ranges before the big break out. Your buy entry would be just above the resistance,
with a target the same distance as the triangle’s height.
For the sell entry, you would do the exact opposite, sell below the support line, and expect a
drop of at least the triangle’s height.
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10 Chart Patterns every pro trader should know
Pattern 9 - Descending Triangle
The descending triangle is a bilateral pattern, meaning that the price could break out from
either side. A breakout is likely where the triangle lines converge. To draw this pattern, you
need to place a horizontal line (the support line) on the support points and draw a descending
line (the downtrend line) along the resistance points. This pattern is the exact opposite of the
ascending triangle previously covered.
This pattern shows the price moving into smaller and smaller ranges before the big breakout.
Your sell entry would be just below the support line, with a target the same distance as the
triangle’s height.
For the buy entry, you would do the exact opposite, buy above the resistance line and expect a
rise of at least the height of the triangle. You can place a stop just below the resistance line.
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10 Chart Patterns every pro trader should know
Pattern 10 - Wedges: rising and falling
Our final patterns are wedges and we will deal with rising and falling wedges.
Rising wedge
Wedge patterns are normally reversal patterns. A rising wedge occurs when the price makes
multiple swings to new highs, yet the price waves are getting smaller. Essentially, the price
action is moving in an uptrend, but contracting price action shows that the upward momentum
is slowing down. Eventually, the price breaks out and in the case of the rising wedge, the price
moves lower.
You would enter a stop just above the wedge and you would enter short. Place your sell trade
just below. The target would be a move-up of the same distance as the height of where the
wedge started.
Falling wedge
The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move
lower. The trading range becomes tighter and tighter until it breaks out. In the case of the
falling wedge, the price normally breaks higher, so it is a bullish pattern. You would have a stop
as shown on the chart just below the wedge. You would buy just as we break out of the pattern
and then look for a target of the same distance as the height of where the wedge started. Take
care as many confuse a falling wedge with a bearish pattern.
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FINAL WORDS
10 Chart Patterns every pro trader should know
I hope you have found this short guide of value and
can use these patterns to help you make better trades.
As stated at the outset, technical analysis and chart
patterns are a guide, not a guarantee. Chart patterns
can be viewed as a tool in your trader’s toolbox
together with indicators such as RSI, MACD, and
moving averages.
Chart patterns help you keep your trading decisions
focussed and disciplined, especially in fast-moving
and volatile markets.
Before investing, you can use a demo account to try
your new skills without risking any funds.
Most brokers offer a demo account free of charge. You
can sign up for a Deriv demo account for example and
use their many charts and trading tools.
As for trading software and websites, there are many
that will automatically add chart patterns to a chart
and allow screenings. With time, you will be able to
spot chart patterns as your eye becomes accustomed
to them.
I wish you every success in your trading.
Vince Stanzione
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GLOSSARY
10 Chart Patterns every pro trader should know
Accumulation Bullish
Accumulation occurs when a stock or market This refers to a market that is rising.
is being purchased at higher prices. Stocks Someone with a positive view of a market
whose prices are rising are considered to be would be a Bull.
under accumulation. Opposite of distribution.
Candlestick charts
Ask price A chart that has open, high, low, and close
The price that you can buy at. Also referred to data sets in a candle form.
as buy or offer price. Opposite of bid price.
Charting
Bearish The study of historical price patterns
This refers to a market in decline. Someone or actions to determine likely future
with a negative view of a market would be a movements.
Bear.
Chart patterns
Bid price Price patterns are trends that occur in stock
The price that you can sell at. Also referred to charts. The patterns form recognisable
as sell price. Opposite of ask/offer price shapes. The common ones are covered in this
ebook.
Bilateral pattern
The bilateral pattern means that the price Continuation patterns
could break out on either side. An example Most chart patterns can be broken down
of a bilateral pattern is an ascending or into two categories — continuation patterns
descending triangle. or reversal patterns. Continuation patterns
continue the trend that was in place prior to
Breakout the development of the continuation pattern.
A cup and handle pattern covered earlier is a
A sustained move through a support or
continuation pattern.
resistance line. As a rule of thumb, this
should consist of more than one day’s
price action. The subsequent move can be
powerful. A breakdown would be where a
support area gives way and the price moves
lower.
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10 Chart Patterns every pro trader should know
Distribution Moving average
Distribution occurs when a stock or market The average price of a stock/market over
is being sold at lower prices. Stocks whose any given (rolling) period of time. It is used
prices are falling consistently are considered primarily as an indication of a trend and is
to be under distribution. It’s the opposite of less useful in rangebound markets. A moving
accumulation. average is usually plotted at the end of the
time period covered but can be centred or
Downtrend shifted as required.
A downtrend is a sequence of lower lows and
lower highs. It’s the opposite of an uptrend. Resistance
A level where sellers are found. Usually
Head and shoulders plotted as a horizontal line touching previous
highs. Can appear at psychological levels, i.e.
Three-pronged chart formation resembles a
big round numbers such as $100 or $1,000.
head and two shoulders, where the second
Resistance can be seen as a ceiling, and it’s
peak marks the extreme of the trend. The
the opposite of support.
third peak fails to extend beyond the second.
The pattern is completed by a break of the
“neckline”, signalling a trend reversal. See Reversal patterns
also the “inverse head and shoulders” chart Reversal patterns reverse the trend that
pattern or market bottoms. was in place prior to the development of the
reversal pattern.
Inverse head and shoulders
The inverse head and shoulders or reverse Rounding bottom
bottom is a bullish pattern and indicates Rounding bottom is a chart pattern that
sellers have been exhausted. Characterised shows the gradual base formation and the
by a large peak downwards with two smaller turn to an uptrend, especially a good long-
peaks on either side, all three levels rise back term base formation. See also rounding top.
to the same resistance level in the neckline.
The trend is then likely to break out in an Rounding Top
upward motion.
A rounding top usually indicates a bearish
downward trend. It tends to show that the
Illiquid markets market is losing strength, with each high
Any market that doesn’t have immediate being lower than the previous one. We then
price discovery, volume, or wide bid/ask see a move through the neckline as support
spreads is an illiquid market. Basically, an fails, then we see a smaller retest (bounce)
illiquid market is the absence of liquid assets. back to the neckline before a larger fall.
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10 Chart Patterns every pro trader should know
Screener
A piece of software or website that allows
you to scan or screen markets or stocks for a
set of rules or trading patterns. Also known
as a filter.
Sideways trend
Markets that trade in a range are in a
sideways trend.
Support
Psychological, fundamental, or technical
level that limits selling in a stock or market.
You can download the chart
Often described as a point where there are
patterns here.
more buyers than sellers. Support is seen
as a floor in the price and is the opposite of
resistance.
Technical analysis
Technical analysis is the study of historical
price action to determine future movements,
usually with the use of charts. It’s the
opposite of fundamental analysis.
Triangle pattern
The triangle pattern is in the form of a
triangle.
Uptrend
An uptrend is a sequence of higher highs and
higher lows. It’s the opposite of a downtrend.
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