The Best Chart Patterns To Trade

Updated: Nov 19

10 Year Reliability Study (200,000 Charts)


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In this video we look at popular chart patterns and determine which are the best chart patterns to trade, supported by a pattern reliability study.


A chart pattern is defined by the price action of a stock price over a specified period, for example, if you were looking at the price action of a daily chart you might spot numerous chart patterns, the trader hopes that such chart patterns offer some predictability of future price in the short term, whereas a trader looking further out at the same patterns, perhaps on a monthly chart, would hope to gain some insight into longer term price moves. Regardless of the time frame, the theory and principle of how chart patterns form, remain the same.


Chart patterns are often placed into a bullish or bearish category, for example, an ascending triangle or a cup and handle pattern would be deemed as bullish continuation patterns, meaning that price was in a prior uptrend before its formation.


A double top pattern would be classed as a bearish reversal pattern, often recognised for price reaching a resistance point on two occasions before making a move downward.


A descending triangle would be classed as a bearish continuation, meaning that price was in a prior downtrend before its formation.

A falling wedge could be deemed as a continuation or a reversal depending on the trend prior to its formation.


The popular head and shoulder pattern could be deemed as bullish or bearish depending on its rotation, in this example of an inverted pattern it is deemed as a bullish reversal. The pattern is complete when two shoulders and a head are established, followed by a break of the neckline.


A pennant or flag pattern is classed as a bullish continuation sign, whereas the less popular Bump and Run pattern can often be seen at the end of bullish trend before it reverses, making it a bearish pattern.


One thing you may notice with all these patterns is that they all form varying lines of support and resistance, followed by a breakout in either direction.


There are many theories as to why certain chart patterns appear with a degree of regularity, and each have their own explanation. In this example we see a price increase, shortly followed by some profit taking, we then see a battle between buyers and sellers, buyers forming points of support, and sellers forming points of resistance. Notice how during this process price volatility contracts through each battle, this eventually moves to an area of equilibrium or a squeeze between bulls and bears. In this example the bulls took control and price broke through resistance, often exaggerated by what is known as a ‘short squeeze’ where sellers must become buyers to close their short positions.


Before we look at the probabilities of success for some of the most popular patterns, lets first understand how the patterns themselves only form part of the trading equation and should not be traded blindly.


In its purest form a pattern is made up of numerous price candles and each candle has its own story. For example, if we are looking for a breakout trade, we would expect the breakout candle to be of a bullish nature, full bodied and perhaps with a small underside wick, we would not however want to see a large wick to the upside of the candle, such a wick would suggest significant resistance from sellers further ahead. They could of course get exhausted, and price could continue up, but trading is all about probabilities and seeing such resistance through a large wick is not ideal.


So, number one could be the chart pattern itself, number two could be the bullish price action of the breakout candle.


Depending on the pattern, we also want price action to be in favour of the pattern prior to its formation.


Volume within the pattern would also need to be considered, with increased volume at the break (showing conviction) being of particular importance.

Price being on the right side or even supported by a longer-term moving average should also be considered. I personally add a shorter-term momentum indicator too.