Main Patterns in Trading: How to Use Them for Market Analysis

Technical analysis has long gone beyond simple indicators. Today, successful trading requires a deep understanding of price patterns and formations that develop on charts. Knowing key patterns helps traders not just react to market movements but also forecast them with greater accuracy. Let’s explore which figures every analyst should include in their arsenal.

Reversal Patterns: Double Top and Double Bottom

When the price reaches approximately the same level twice and then bounces down, it may signal a reversal. A double top indicates exhaustion of demand and a potential decline in quotes. The opposite scenario – a double bottom – shows that sellers have exhausted their potential, and a recovery is beginning.

These patterns are especially valuable in trading because they provide clear entry and exit points. However, it’s important to wait for a breakout of resistance or support levels to confirm the signal.

Head and Shoulders: A Classic Reversal Pattern

One of the most reliable technical analysis figures is the head and shoulders. When it forms after a prolonged uptrend, it often precedes a significant price decline. The pattern consists of three peaks: two lateral shoulders lower than the central peak (the head).

Traders use this model to determine entry points for short positions. The target price can be calculated by measuring the distance from the head to the neckline and projecting it downward from the breakout point.

Flag and Pennant: Trend Continuation

Unlike reversal patterns, flags and pennants indicate temporary price consolidation. After a strong move up or down, the market pauses, forming a compact figure, and then continues moving in the same direction.

These patterns are used in trading to enter ongoing trends at better prices. They are often accompanied by decreased volatility, making them more predictable.

How to Properly Use Patterns: Key Rules

When using any price models, it’s important to remember a few key points. First – never rely solely on the pattern. Check the volumes: rising volumes during a breakout confirm the signal, while low volumes may indicate a false signal.

Second – look for additional confirming signals. This could be indicator divergence, a bounce from key support-resistance levels, or the formation of multiple patterns simultaneously.

Pattern-based trading is most effective when you combine several analysis methods. Don’t forget about risk management and position control – even the best signals do not guarantee profit without proper loss control.