From Novice to Pro: Your Roadmap to Famous Price Action Patterns

Are you familiar with the intriguing world of price action famous patterns? Chart patterns are the heartbeat of the financial markets. They serve as a visual representation of market psychology, helping traders and investors make informed decisions.

Have you ever wondered how these patterns can impact your trading decisions? In this article, we’ll explore the fascinating world of price action famous patterns, decoding their significance and shedding light on their relevance in the ever-changing finance landscape.

The Most Famous Famous Price Action Patterns

These price action patterns are like the footprints of market sentiment, guiding traders toward profitable decisions. In the following, we will explore the most famous patterns that have stood the test of time.

Head & Shoulders Top Pattern

The head and shoulders top pattern is a prominent stock chart pattern often used by traders to anticipate a reversal of an ongoing uptrend. Despite its 81% success rate, it’s essential to note that the average price movement during a bull market when this pattern forms is approximately -16%.

Characteristics of Head & Shoulders Top Pattern

First Shoulder: After an extended period of bullish market movement, the pattern begins with forming the first “shoulder.” This occurs when the price rises and then experiences a decline, ultimately reaching a trough or lower point.

Head: The “head” of the pattern is created when the price rises again, forming a peak higher than the initial shoulder. This high peak serves as a distinctive feature of the pattern.

Second Shoulder: Following the formation of the head, the price starts to decline again, leading to the development of the second shoulder. This second shoulder often resembles the appearance of the first one.

Reversal Confirmation: It’s crucial to note that the price drop after the formation of the first shoulder does not usually continue substantially below the level of the first shoulder. Instead, there may be a minor retracement or a period of price consolidation.

How to Identify the Head & Shoulders Top Pattern?

Here’s how to recognize the head & shoulders top price action patterns:

• Uptrend Observation: Begin by assessing the price chart for the presence of an existing uptrend. The head and shoulders top pattern is a reversal pattern that typically appears after a sustained upward movement.
• Three Peaks: Look for three prominent price peaks on the chart. The first peak is the left shoulder, the second is the head, and the third is the right shoulder. These peaks should be visibly distinct from the surrounding price action.
• Shoulder Heights: Note that the left and right shoulders are approximately at the same height. The head, representing a significant shift in market sentiment, should be higher than both shoulders.
• Neckline: Identify the neckline, a support level that connects the lows of the left shoulder, head, and right shoulder. 
• Volume Analysis: Consider trading volume. A substantial increase in trading volume upon the neckline break can add confidence to the pattern’s validity.
• Stop-loss: Employ a stop-loss order above the neckline or the right shoulder to manage risk. This limits potential losses if the price unexpectedly reverses.
• Pattern Duration: Observe the duration of the pattern. Longer formations may indicate a more significant potential price movement following the reversal.

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Inverted Head and Shoulders Price Action Pattern

The Inverted Head and Shoulders price action patternss typically consist of three troughs, with the middle trough (the head) being the lowest and two higher troughs on either side (the shoulders). This pattern suggests a potential reversal from a downtrend to an uptrend.

Characteristics of Inverted Head and Shoulders

Three Troughs: The pattern is characterized by three distinct troughs.

Head: The middle trough, known as the head, is the lowest point within the pattern.

Shoulders: The two outer troughs, called the shoulders, are higher in position than the head.

Neckline: The neckline connects the peaks formed by the shoulders. A breakout above the neckline is considered a bullish signal.

How To Identify the Inverted Head and Shoulders Price Action Pattern?

To identify this pattern, follow these steps:

1. Look for Three Valleys: Start by examining the price chart for three distinct low points, often called valleys. These lows form the basis of the pattern.
2. Identify the Head: Among the three low points, locate the middle one, typically the lowest and referred to as the “head.”
3. Find the Shoulders: Look for “shoulders.” These shoulders are usually higher than the head.
4. Draw the Neckline: To complete the pattern identification, draw a neckline. This neckline is created by connecting the highs between the two shoulders. It serves as a critical reference line.
5. Pattern Confirmation: After identifying the three valleys (head and shoulders) and drawing the neckline, watch for price action near the neckline. The confirmation of the pattern occurs when the price breaks above the neckline.

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Double Bottom Price Action Patterns

The Double Bottom pattern is a highly reliable chart pattern in technical analysis, boasting an 88% success rate in reversing existing downtrends. It’s known for its potential to lead to a substantial average price increase of approximately 50%. The only pattern with a better success rate is the cup and handle.

Characteristics of Double Bottom Pattern

“W” Shaped Pattern: The Double Bottom pattern is characterized by a distinct “W” shaped pattern on a price chart. It occurs when the security’s price hits a low point twice, with each low forming a trough.

Reversal Indication: This pattern is a robust indicator of a potential reversal in an ongoing downtrend. The stock’s price may be on the verge of an upward movement.

How to Identify a Double Bottom Price Action Patterns?

To identify a Double Bottom pattern, investors should follow these steps:

1. Two Lows: Look for two distinct lows in the security’s price that create the “W” shaped pattern. These lows should be approximately at the same price level.
2. Timeframe: This pattern is typically visible on intraday and daily charts, allowing investors to analyze it over different timeframes.
3. Confirmation: After identifying the two bottoms, watch for confirmation of a trend reversal. Confirmation can occur through a breakout:
4. Above the Upper Resistance Line: If the security’s price breaks out above the upper resistance line, it suggests that the reversal may be complete.
5. Below the Lower Support Line: Conversely, a price breakout below the lower support line may indicate a continuation of the downtrend.

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Triple Bottom Pattern

The Triple Bottom pattern is known for its high success probability, with an 87% chance of success and an average price increase of approximately 45%.

Characteristics of Triple Bottom Pattern

“VVV” Shaped Pattern: The Triple Bottom pattern forms a distinctive “VVV” shape on a price chart. It occurs when the price hits a low point three times, with each low nearly equal in value.

How To Identify a Triple-Bottom Pattern?

Finding a triple bottom pattern is exactly like finding a bottom pattern. To identify a Triple Bottom pattern, you should look for three distinct lows in the security price that create a “WV” or “VVV” pattern. These lows should be approximately at the same price level.

Also, this pattern is typically visible on daily and weekly charts, allowing investors to assess it over different timeframes.

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Descending Triangle Price Action Patterns

The Descending Triangle pattern often suggests the possibility of either a trend reversal or the continuation of an existing downtrend. This pattern is recognized by converging two significant trendlines: an upper horizontal resistance line and a lower support line sloping downwards.

Characteristics of Descending Triangle Pattern

Two Trendlines: The Descending Triangle pattern consists of two primary trendlines: an upper horizontal resistance line and a lower downward-sloping support line.

Triangle Shape: These trendlines converge toward each other, creating a triangular pattern that points downward.

How to Identify a Descending Triangle?

To identify a Descending Triangle pattern, follow these steps:

1. Look for Two Trendlines: Examine the price chart for two trendlines. The upper trendline is horizontal and represents resistance, while the lower trendline slopes downward and serves as support.
2. Triangle Formation: These two trendlines should converge towards each other, forming a triangle-shaped pattern with a downward-pointing apex.
3. Confirmation: After identifying the Descending Triangle, watch for confirmation of a potential trend reversal or continuation.
4. Breakout Above Resistance: If the security’s price breaks out above the upper resistance line, it may signal the end of the downtrend.
5. Breakout Below Support: Conversely, a price breakout below the lower support line could indicate the continuation of the existing downtrend.

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Ascending Triangle Pattern

The Ascending Triangle pattern is characterized by its triangular shape with an upward-sloping support line and a flat resistance line. This pattern provides valuable insights for traders and investors, with an 83% chance of success when the price breaks through the upper resistance.

Characteristics of Ascending Triangle Pattern

Triangle Shape: A triangle visually represents the pattern, with its apex pointing upwards. This triangle connects an upward-sloping support line and a horizontal resistance line.

Continuation or Reversal: Ascending triangles can serve as either continuation or reversal patterns, depending on the direction of the prior trend. If the market were in an uptrend before the triangle formed, a breakout above the upper trendline would likely lead to prices continuing in the direction of the prior trend. Conversely, if the market was in a downtrend before forming an ascending triangle, a break below the lower trendline could signal a continuation.

How to Identify the Ascending Triangle Pattern?

Identifying an Ascending Triangle pattern involves specific visual cues on a price chart:

• Support and Resistance Lines: Look for an upward-sloping support line and a flat resistance line. These two lines converge to form a triangular shape.
• Breakout Direction: To use this pattern effectively, traders watch for breakouts above or below these lines. The direction of the breakout provides insight into the potential future price movement. When the price breaks through the upper resistance of an ascending triangle, there is an 83% chance of a successful trade with an average price increase of 43%. Traders often wait for this breakout to confirm the pattern.

High Tight Bull Flag Pattern

The High Tight Bull Flag pattern suggests the potential for continuing or reversing an existing uptrend, providing valuable insights for traders and investors.

Characteristics of High Tight Bull Flag Pattern

Quick Rise and Consolidation: This pattern occurs following a quick and sharp rise in the price of a security. It is characterized by a subsequent period of consolidation, during which prices move within two parallel trendlines.

Breakout Potential: The High Tight Bull Flag pattern can indicate that the security’s price is poised for a significant move, either higher or lower, depending on the direction of the breakout.

Intraday and Daily Charts: The pattern is typically visible on both intraday and daily charts, offering a comprehensive view of the price behavior.

Profit Potential: Historically, there is an 85% probability of success associated with this pattern, with an average profit of 39%. 

How To Identify the High Tight Bull Flag Pattern?

Identifying a High Tight Bull Flag pattern involves specific visual cues on a price chart:

1. Sharp Price Rise: The pattern begins with a rapid and pronounced price increase, reflecting strong buying pressure.
2. Ascending Triangle: Look for the formation of an ascending triangle within the price chart. This triangle is created by two parallel trendlines: an ascending lower trendline and a horizontal upper resistance line.
3. Breakout Confirmation: Traders often wait for a breakout from the consolidation phase to confirm the pattern’s validity. A breakout above the upper resistance line may indicate a bullish continuation, while a break below the lower support line could signal a downtrend.

Rectangle Top Pattern

The Rectangle Top pattern often indicates a period of consolidation in the stock price, with significant implications for future price movements.

Alt: Rectangle Top Pattern

Characteristics of Rectangle Top Pattern

Parallel Horizontal Trendlines: Two parallel and horizontal trendlines define the rectangular top pattern. These trendlines act as critical support and resistance levels, indicating that the stock’s price trades within a defined range.

Consolidation Phase: This pattern typically occurs after an uptrend when investors become less aggressive in increasing prices. It suggests the stock’s price has stable support and resistance levels at similar prices.

Bull Market Context: The Rectangle Top pattern is particularly noteworthy during a bull market. When the price breaks upward out of the rectangular pattern during such market conditions, there is an 85% success rate, with the potential for a 51% profit.

Impending Trend Reversal: The formation of a rectangular top pattern can indicate that the prior upward trend may be approaching its end, potentially followed by a significant price decline.

How To Identify Rectangle Top Pattern?

To trade with a rectangle top pattern, you need to follow these steps:

1. Look for a Prior Uptrend: Before identifying a Rectangle Top pattern, it’s essential to establish a prior uptrend in the stock’s price. This pattern often occurs after a sustained period of upward movement.
2. Spot Parallel Horizontal Trendlines: Examine the price chart to identify two parallel horizontal trendlines. These trendlines should enclose the stock’s price within a relatively narrow range.
3. Price Consolidation: During this phase, the stock’s price repeatedly approaches the upper resistance line and retreats from it, forming a horizontal upper boundary.
4. Confirming the Pattern: Look for multiple instances where the stock’s price touches the upper resistance and lower support lines without significant breakouts.
5. Volume Analysis: In many cases, trading volume tends to decline as the Rectangle Top pattern forms, indicating reduced investor interest.
6. Breakout Potential: Look for a breakout above the upper resistance line, as it can signal a potential trend continuation.

Rectangle Bottom Price Action Patterns

The Rectangle Bottom pattern signifies the potential for reversing an existing downtrend, with promising implications for traders and investors.

Characteristics of Rectangle Bottom Pattern

The features of the rectangle bottom pattern are as follows:

• Consolidation at the Bottom: The rectangular bottom pattern occurs when the security price consolidates at the lower end of a downtrend. This consolidation forms a distinct “www”-shaped pattern.
• Potential Reversal: This pattern is particularly significant as it suggests the potential for a trend reversal. When a breakout occurs from this consolidation phase, there is an 85% success rate, with an average gain of 48%.
• Directional Breakout: The ultimate direction of the breakout, whether upward or downward, depends on market dynamics. 
• Bounces off Support and Resistance: To identify this pattern, look for at least four distinct price bounces off the support and resistance lines within the consolidation area.
• Intraday and Daily Charts: Generally, the pattern should be visible on both intraday and daily charts, providing a comprehensive view of the price behavior.
• Risk Management: When trading based on this pattern, it’s essential to implement risk management strategies, such as stop-loss orders, to protect against unexpected market movements.

Rising Wedge Price Action Patterns

The Rising Wedge pattern suggests an average % success rate of 81% during a resistance breakout in a bull market, with an average 38% price increase.

Characteristics of Rising Wedge Pattern

Wedge Shape: The pattern is visually represented by a wedge shape formed by two upward-sloping trendlines that converge toward each other. This wedge points upwards.

Success Rate: Testing shows that the Rising Wedge pattern has an average success rate of 81% during a resistance breakout in a bull market. This means that the price will likely continue its upward movement when a breakout occurs.

Price Increase: On average, traders can expect an average price increase of 38% when a Rising Wedge pattern results in a breakout. This potential profit can make it an attractive pattern for traders.

Trend Reversal Warning: The Rising Wedge can also indicate a potential trend reversal. If the price breaks below the lower support line, it could signal that the uptrend is losing momentum, and prices may move lower. Traders often use this pattern as a warning sign to exit or consider short positions.

How To Identify the Rising Wedge Pattern

Identifying a Rising Wedge pattern involves specific visual cues on a price chart:

1. Upward-Sloping Trendlines: Look for two trendlines that slope upwards and converge, forming a wedge shape. One trendline connects the higher highs, while the other connects the higher lows.
2. Breakout Direction: To use this pattern effectively, traders watch for breakouts either above the upper resistance line or below the lower support line. The direction of the breakout provides insight into potential future price movement.

Falling Wedge Pattern

The Falling Wedge pattern is a significant chart pattern used in technical analysis. It suggests the potential for reversing an existing downtrend with a 74% success rate and an average 38% price increase.

How To Identify the Falling Wedge Pattern?

When analyzing a price chart, there are telltale signs that might help you identify a Falling Wedge pattern:

1. Converging Trendlines: Look for two trendlines that converge towards each other, forming a wedge shape. One trendline connects the lower highs, while the other connects the lower lows.
2. Breakout Direction: Traders watch for breakouts either above the upper resistance line or below the lower support line. The direction of the breakout provides insights into potential future price movement.
3. Trend Reversal Signal: The Falling Wedge serves as a signal of a potential trend reversal. If the price breaks above the upper resistance line, it suggests that the security has completed its reversal and may begin an uptrend. Conversely, a break below the lower support line could signal a continuation of the downtrend.

Bullish Pennant Price Action Pattern

The Bullish Pennant Pattern is a common technical analysis pattern traders and investors use to identify potential bullish price continuation trends in financial markets.

Characteristics of the Bullish Pennant Pattern

Shape: The Bullish Pennant resembles a small symmetrical triangle or flag, with a short-term consolidation period following a strong upward price movement.

Duration: This pattern typically forms on daily charts over a relatively short period, often just a few weeks.

Volume: During the consolidation phase (the flagpole), trading volume tends to decrease, indicating a temporary pause in the market.

How To Identifying the Bullish Pennant Pattern?

Identifying the Bullish Pennant Pattern involves recognizing specific visual cues and price movements on a price chart. Here’s how to identify this pattern:

• Prior Uptrend: Start by confirming a preceding uptrend in the asset’s price. The Bullish Pennant typically appears after a significant upward price movement.
• Flagpole: Look for a sharp and strong upward price movement, often called the “flagpole.” This is the initial phase of the pattern and represents the rapid price increase that precedes the consolidation phase.
• Pennant Formation: After the flagpole, observe the price action for forming a small, symmetrical triangle or flag-shaped pattern. This is the “pennant” itself. The pennant is characterized by two converging trendlines: one connecting lower highs (the upper trendline) and one connecting higher lows (the lower trendline).
• Stop Loss: Setting a stop-loss order just below the lower trendline of the pennant can help manage risk in case the pattern fails to materialize.
• Breakout: The Bullish Pennant pattern is confirmed when the price breaks from the pennant formation to the upside. The breakout is a critical element of this pattern and indicates the potential continuation of the prior uptrend.
• Entry Point: The breakout above the upper trendline of the pennant is seen as a potential entry point for bullish trades. 

Bearish Pennant Pattern 

The Bearish Pennant Pattern is a technical analysis chart pattern that suggests a potential downtrend continuation. It is characterized by a flag-like formation on a price chart and has a success rate of 55.19%. 

Characteristics of the Bearish Pennant Pattern

Flagpole: The pattern begins with a strong and sharp downward price move known as the flagpole. This flagpole represents a significant bearish sentiment in the market.

Pennant Formation: After the flagpole, there is a consolidation phase where the price forms a small and symmetrical triangle or flag-shaped pattern. 

Volume: Typically, during the flagpole phase, there is a surge in trading volume, indicating strong selling pressure. 

How To Identify the Bearish Pennant Pattern?

• Look for a preceding sharp downward price movement (flagpole).
• Identify the consolidation phase with converging trendlines, forming a triangular pattern (the pennant).
• Confirm that the volume decreases during the pennant formation.
• Await a breakout to the downside, which confirms the Bearish Pennant Pattern.

Conclusion on Price Action Patterns

Price action patterns are the building blocks of successful trading. These visual cues on price charts offer insight into market sentiment and potential price movements. By mastering these patterns, traders gain a powerful tool for making informed decisions and increasing their chances of profitability.

Whether you’re a novice trader looking to understand the basics or an experienced investor seeking to fine-tune your strategy, recognizing and interpreting these famous price action patterns is worth honing. 

Remember, knowledge is the key to success in the financial markets, and with the right insights, you can confidently navigate the turbulent waters of trading. 

Happy trading!