Broadening formations are a type of chart pattern that can be used by technical analysts to identify price trends in the market. Broadening formations occur when prices move increasingly farther away from their previous highs and lows, creating two diverging trend lines — one rising and one falling. Broadening formations often appear after significant rises or falls in security prices, and they are identified on charts by a series of higher pivot highs and lower pivot lows. These patterns provide useful insights into the direction of current market trends which traders can use to inform their trading decisions. They work by visualizing historical market movements and trends, helping traders predict future price actions.

The rectangle ends with a breakout as the price moves out of the rectangle. Please note the list of stock chart patterns in our article is not exhaustive and that there are others that traders and analysts use. It is also crucial to highlight that while chart patterns can be beneficial, they should always be used in conjunction with other forms of technical analysis.

The risk-reward is attractive for new entries at current levels with a stop below Rs 240. Upside targets are sometimes reached in the coming weeks if the uptrend continues. The scallop pattern is considered a continuation pattern that signals the persistence of the overall bullish trend.

This imbalance leads to sideways and downward arc price action as buyers and sellers struggle to take control. The flag represents a pause in the downtrend as some short-term traders take profits. However, overall sentiment remains bearish, and most traders anticipate lower prices after this brief consolidation. Trevor Davis’ 2023 study, “Reversal Patterns in Bear Markets,” conducted by the Market Analysis Institute, found that descending triangles have a 68% success rate in predicting reversals from bullish to bearish trends. Traders often use double tops to identify potential short-selling opportunities or to exit long positions.

• Quite a number of these patterns, such as the flag, pennant, head and shoulders, and rising and falling wedges have logical price objectives where a trader could seek to take profits.
• This price range is eventually considered as a potential target price of the downside move when the price finally breaks below the neckline.
• Often, the volume will decrease during the formation of the pennant, followed by an increase when the price eventually breaks out.
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• The rounded shape represents the changeover from the preceding downtrend.
• This structure reflects consolidated trading activity confined between support and resistance trendlines.
• The Flag’s sloping, contained price action allows nimble traders to enter during the formation with a tight stop-loss, targeting quick profits in the direction of the preceding trend.

Markets

This chart formation patterns trading pattern reflects sustained selling pressure, with sellers dominating and pushing the price to lower levels. They are often driven by market news or significant events, reflecting high volatility. Spikes can indicate either a reversal or continuation, depending on subsequent price action. This trading pattern typically appears at the peak of an uptrend and indicates that the trend is losing momentum, with sellers starting to dominate. Gaps reflect strong market sentiment and are often confirmed by increased trading volume.

False breakouts are avoided by waiting for confirmation before entering a trade based on a chart pattern. A false breakout occurs when the price breaks out of a pattern but fails to continue in the expected direction. Traders reduce whipsaws from false breakouts by requiring additional confirmation beyond the initial break. Understanding and correctly interpreting these patterns, help traders make more informed decisions, effectively manage risk, and potentially improve their overall trading performance in various market conditions.

It resembles a “U” shape and suggests a slow but steady accumulation phase before the price rises. This pattern signals that the uptrend is reversing, and a downtrend is expected. The breakdown below the support level formed by the intermediate trough confirms the reversal.

This measurement is then projected from the breakout point to estimate the potential price movement. The image shows this projected range as a blue shaded area extending upwards after an upward breakout. The Quasimodo pattern gets its name from its distinct shape that resembles the hunchback from The Hunchback of Notre Dame. The psychology behind this pattern relates to the sequence of pessimism and failed pessimism. The attempt to make a second lower low shows continued pessimism, but its failure indicates a shift as bulls start to return. The higher low confirms the transition from bearish to bullish market psychology.

What are the Bearish Chart Patterns?

The bullish flag consists of a sharp increase in price followed by a consolidation period where the price moves sideways in a tight range, resembling a flag on the chart. Bullish chart patterns indicate a potential price increase, such as ascending triangle, double bottom, inverse head and shoulders, and bullish flag. Bilateral chart patterns are chart formations that signify periods of market indecision, where the price can break out in either direction.

Trendlines

• Utilizing other tools and indicators of a different nature can be used alongside it for further validation.
• However, this extreme sentiment is not sustained, and the trading range indicates a period of indecision or consolidation.
• We might also be seeing a big shift in what people are investing in, like AI-driven companies.
• The best timeframe for chart patterns depends on the trader’s strategy and goals.
• The V pattern  consists of a sharp downward price movement followed by an equally rapid upward movement, forming the distinct V-shape on the price chart that signals a potential shift from a bearish to a bullish market.
• The cup and handle pattern is formed by a drop in a security’s price followed by a rise back toward the prior peak, which forms the cup shape, and then a smaller drop and rise, which forms the handle.
• These trading chart patterns form over an extended period, reflecting a slow but steady change in market sentiment.

Pennants are characterized by converging trend lines and typically result in a breakout in the direction of the prior trend. Traders use chart patterns to identify stock price trends when looking for trading opportunities. Some patterns tell traders they should buy, while others tell them when to sell or hold. Trendlines with three or more points are generally more valid than those based on only two points. Another point to bear in mind is that different patterns have different entry and exit rules, and traders may approach patterns in different ways.

After a scallop consolidates, the expectation is for the uptrend to resume again with the price moving to new highs. The three drives pattern reflects the psychology of the market participants. The corrective second drive makes traders question the sustainability of the trend. The third and final drive fakes a breakout, trapping bulls or bears who have tried to trade the reversal.

Island Reversal Pattern

The cup and handle is a bullish continuation chart pattern where an upward trend has paused but will continue once the pattern is confirmed. The breakout was confirmed with strong volume and a gap up open the following day. GEECEE held above the 265 level on the retest, confirming it as a new support area.

How to Spot Key Stock Chart Patterns

Each type of chart plots price action differently, and displays different information about the price action for a given time frame. The opening price, the closing price and the direction of the price movement are all … Therefore, you need to be fully aware of what is required to trade equities successfully. Traders should use the Sanku Pattern in conjunction with other technical analysis tools to improve the accuracy of their predictions.

Harmonic Chart Pattern

The head and shoulders pattern is a bearish reversal pattern that forms at the peak of an uptrend, signaling the trend is about to reverse. The head and shoulders consist of three peaks, with the middle peak being the highest (known as the ‘head’) and the two outside peaks being lower and roughly equal in height (known as the ‘shoulders’). Bullish flag patterns have a 75% success rate in predicting upward continuations, according to Johnson’s 2023 study, “Continuation Patterns in Bull Markets,” conducted by the Institute of Financial Analysis.

A continuation pattern can be considered a pause during a prevailing trend. This is when the bulls catch their breath during an uptrend or when the bears relax for a moment during a downtrend. While a price pattern is forming, there is no way to tell if the trend will continue or reverse. As such, careful attention must be placed on the trendlines used to draw the price pattern and whether the price breaks above or below the continuation zone. Technical analysts typically recommend assuming a trend will continue until it is confirmed that it has reversed. Support and Resistance Lines are often confused with trendlines but they are horizontal lines under the lows and above the highs respectively.

Observe the example above to study how price forms an upward stairs to continue its trend towards upside. The psychology behind this pattern is that after a sharp advance up, traders take profits, which causes a normal pullback and consolidation. The decreasing volume and volatility reflect a cooling-off period where supply and demand temporarily reach equilibrium. The contracting triangle shape suggests both buyers and sellers becoming indecisive during this pause. Once it breaks, the power of sellers is lost, and buyers start to accelerate their buying positions.