Charting patterns are recognisable shapes or formations that can be identified through the observation of the historical prices of a tradable asset such as a stock or cryptocurrency.
Common charting patterns include:
- Cup and handle
- Ascending triangle
- Descending triangle
- Inverse head and shoulders
Charting patterns often signal the continuation or reversal of a noticeable trend. The 3 main types of charting trends are listed below.
- Uptrend: ascending peaks and troughs—higher highs and higher lows
- Downtrend: descending peaks and troughs—lower highs and lower lows
- Consolidation: prices move sideways within a horizontal range
Investors and traders observe patterns and trends over multiple time frames to inform their expected future price action.
Why Patterns Are Important
Charting patterns are commonly used by investors and traders to form the basis of their TA. They are helpful for interpreting changes in market sentiment, trends and activity, and are often used with other TA indicators and fundamentals to forecast possible future price outcomes, for example, what the price might do if a trend continues, or what might happen if the trend is reversed.
The use of patterns isn’t a crystal ball and does not guarantee future price action. Instead, investors and traders use chart patterns as part of a broader strategy to forecast different possible future outcomes, attributing a probability to each providing an array of weighted possibilities. This can influence an investor or trader’s decision to enter or exit a market or to increase or decrease the size of an existing position.
Learning about and practicing the identification of charting patterns can help to make more informed investment and trading decisions. If you’re interested in learning more about patterns, trends and TA, check out our trusted trading education partners in the ‘Members Discounts‘ section.