3 Main Types of Chart Patterns in Technical Analysis

It is crucial to know how to read chart patterns. They provide a deeper market overview and help to generate different trading signals. However, it is not enough to know how they work. Traders should have a deep understanding of how to use different types of chart patterns. It is a great chance to get an additional powerful instrument in your trading toolkit.

Furthermore, it is not enough to know as many chart patterns in technical analysis as possible. It is also important to know how to classify and categorize them. This is actually what we are going to learn in this article.

Reversal Type of Chart Patterns

The name of this chart pattern speaks for itself. Traders use it to generate signals of the ongoing trend to make a reversal, which means changing the course. To trade reversal patterns, you need to follow a simple concept:

1. If the reversal pattern is plotted during the uptrend, it signalizes the trend to make a reversal and head down shortly.
2. Oppositely, if the pattern is plotted during the downtrend, traders can expect the price to go up soon.

Traders can use different types of chart patterns to track reversal. The main ones include the following:

• Double Top and Double Bottom.
• Head & Shoulders and Inverse Head & Shoulders.
• Rising Wedge and Falling Wedge.

How to Trade Reversal Types of Chart Patterns

Investors will find it easy to trade with reversal patterns. All you have to do is to place an order following the same direction as the trend, generally, beyond the neckline. The next stage is to go for the target at the top of your formation.

Risk management is crucial when using reversal patterns. Traders should never ignore placing a stop-loss order somewhere in the middle of the formation.

Continuation Type of Chart Patterns

Unlike reversal chart patterns that show the trend reversal, continuation patterns signalize the price to resume. Also known as consociation patterns, they indicate how bullish and bearish traders make a short break before moving in the same direction as the previous trend.

You should not expect to move straight. It is not a line. It makes pauses and breaks to correct its lows and highs. Moreover, it can pause to regain momentum and keep on pushing the overall price. The three major continuous chart patterns to consider include:

• Pennants.
• Wedges.
• Rectangles.

As you can see, the list above contains wedges that can serve as both reversal and consolidation patterns depending on the trend formation.

How to Trade Continuous Types of Chart Patterns in Technical Analysis

To trade consolidation patterns, you have to place an order below or above the formation. The exact location will depend on where the ongoing trend is moving. The next stage is to go for the target by selecting the least size of the rectangle or wedge.

When trading pennants, it is possible to target the top of the pennant (the height of the pattern mast). When it comes to risk management when trading consolidation patterns, the stop-loss order is usually placed below or above the formation depending on where the trend is heading.

Bilateral Type of Chart Patterns

It is probably the trickiest type of chart pattern in technical analysis, as they signalize the price moving either up or down. In other words, the signal can be quite hard to read or identify. A bilateral signal is usually used when trading triangle formations.

To trade them, traders must take into account both scenarios with either the price moving up or down. What’s more, you need to place two orders, one of them located at the bottom and the other one on the top of the formation. Once one of your orders has been triggered, you should rush and cancel the other one.

On the one hand, bilateral patterns seem to deliver double winning chances. On the other hand, the possibility of catching a false signal or break is very high, especially when placing market entry orders too close to the bottom or top of the bilateral formation.

Once again, whatever you do, never forget to place a stop-loss order!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.