A chart pattern is a recognizable formation on a price chart that indicates potential future price movements, based on historical trends. These patterns form the foundation of technical analysis and require traders to not only understand what they’re observing but also to interpret what it signals about upcoming market behavior.
There is no single “best” chart pattern, as each serves to identify different market trends across a wide range of trading environments. Chart patterns are commonly utilized in candlestick trading, which provides clearer insights into historical market opens and closes.
Certain patterns are more effective in volatile markets, while others are better suited to stable or trending conditions. Similarly, some patterns are particularly useful in bullish markets, while others perform best under bearish conditions.
Therefore, understanding which chart pattern aligns best with your specific market context is essential. Using an inappropriate pattern—or being unsure of which one to apply—can lead to missed trading opportunities or suboptimal decisions.
Before delving into the nuances of individual chart patterns, it’s important to first understand the concepts of support and resistance levels.
These levels are a reflection of the ongoing struggle between supply and demand—or, more specifically, buyers and sellers. When demand exceeds supply (more buyers than sellers), prices generally increase. Conversely, when supply outweighs demand (more sellers than buyers), prices typically decline.
For example, an asset may rise in price as demand outpaces supply. However, once the price reaches a level that buyers deem too high, demand may drop and sellers begin to dominate—creating a resistance level. As more buyers exit their positions, the price may decline toward a support level, where it becomes attractive enough for new buyers to re-enter the market.
If demand continues to increase at the support level, it can push the price back up toward resistance. Notably, if the price breaks through a resistance level, that level can sometimes transform into a new support level, signaling a potential shift in market sentiment.
Harsh Agarwal
Founder and Director – Harsh Groups (India) & Moneyplant DMCC (UAE)
Harsh Agarwal is a dynamic and accomplished entrepreneur with over 13 years of experience in the stock market, forex trading, and commodities. Born on May 4, 1987, in Jaipur, India.This early mentorship helped shape Harsh’s deep understanding of cross-currencies, futures, and commodities trading during his school and college years.
After earning his Bachelor of Commerce degree in 2008, he was appointed Director of Harsh Groups, where he played a pivotal role in developing business strategy, managing workforce operations, and hedging commodity positions to create arbitrage opportunities.
In 2012, Harsh expanded his career to the United Arab Emirates, joining Moneyplant DMCC. From a Sales Executive role, he swiftly rose to become CEO in 2018, and by 2019, he became the 100% shareholder and Director of the firm. His expertise in contango and backwardation strategies, particularly in options and futures currencies, has positioned him as a leading voice in commodity and forex trading.
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A holder of the prestigious Dubai Golden Visa, Harsh currently resides in Villa 30, Al Satwa, near Canadian University Dubai, with his wife and three children. His ongoing focus is on achieving sustainable business growth and empowering those who work alongside him.
Chart patterns fall broadly into three categories: continuation patterns, reversal patterns and bilateral patterns.
For all of these patterns, you can take a position with CFDs. This is because CFDs enable you to go short as well as long – meaning you can speculate on markets falling as well as rising. You may wish to go short during a bearish reversal or continuation, or long during a bullish reversal or continuation – whether you do so depends on the pattern and the market analysis that you have carried out.
The most important thing to remember when using chart patterns as part of your technical analysis, is that they are not a guarantee that a market will move in that predicted direction – they are merely an indication of what might happen to an asset’s price.
Head and shoulders is a chart pattern in which a large peak has a slightly smaller peak on either side of it. Traders look at head and shoulders patterns to predict a bullish-to-bearish reversal.
Typically, the first and third peak will be smaller than the second, but they will all fall back to the same level of support, otherwise known as the ‘neckline’. Once the third peak has fallen back to the level of support, it is likely that it will break out into a bearish downtrend.
A double top is another pattern that traders use to highlight trend reversals. Typically, an asset’s price will experience a peak, before retracing back to a level of support. It will then climb up once more before reversing back more permanently against the prevailing trend.
A double bottom chart pattern indicates a period of selling, causing an asset’s price to drop below a level of support. It will then rise to a level of resistance, before dropping again. Finally, the trend will reverse and begin an upward motion as the market becomes more bullish.
A double bottom is a bullish reversal pattern, because it signifies the end of a downtrend and a shift towards an uptrend.
A rounding bottom chart pattern can signify a continuation or a reversal. For instance, during an uptrend an asset’s price may fall back slightly before rising once more. This would be a bullish continuation.
An example of a bullish reversal rounding bottom – shown below – would be if an asset’s price was in a downward trend and a rounding bottom formed before the trend reversed and entered a bullish uptrend.
Traders will seek to capitalise on this pattern by buying halfway around the bottom, at the low point, and capitalising on the continuation once it breaks above a level of resistance.
The cup and handle pattern is a bullish continuation pattern that is used to show a period of bearish market sentiment before the overall trend finally continues in a bullish motion. The cup appears similar to a rounding bottom chart pattern, and the handle is similar to a wedge pattern – which is explained in the next section.
Following the rounding bottom, the price of an asset will likely enter a temporary retracement, which is known as the handle because this retracement is confined to two parallel lines on the price graph. The asset will eventually reverse out of the handle and continue with the overall bullish trend.
Wedges form as an asset’s price movements tighten between two sloping trend lines. There are two types of wedge: rising and falling.
A rising wedge is represented by a trend line caught between two upwardly slanted lines of support and resistance. In this case the line of support is steeper than the resistance line. This pattern generally signals that an asset’s price will eventually decline more permanently – which is demonstrated when it breaks through the support level.
A falling wedge occurs between two downwardly sloping levels. In this case the line of resistance is steeper than the support. A falling wedge is usually indicative that an asset’s price will rise and break through the level of resistance, as shown in the example below.
Both rising and falling wedges are reversal patterns, with rising wedges representing a bearish market and falling wedges being more typical of a bullish market.
Pennant patterns, or flags, are created after an asset experiences a period of upward movement, followed by a consolidation. Generally, there will be a significant increase during the early stages of the trend, before it enters into a series of smaller upward and downward movements.
Pennants can be either bullish or bearish, and they can represent a continuation or a reversal. The above chart is an example of a bullish continuation. In this respect, pennants can be a form of bilateral pattern because they show either continuations or reversals.
While a pennant may seem similar to a wedge pattern or a triangle pattern – explained in the next sections – it is important to note that wedges are narrower than pennants or triangles. Also, wedges differ from pennants because a wedge is always ascending or descending, while a pennant is always horizontal.
The ascending triangle is a bullish continuation pattern which signifies the continuation of an uptrend. Ascending triangles can be drawn onto charts by placing a horizontal line along the swing highs – the resistance – and then drawing an ascending trend line along the swing lows – the support.
Ascending triangles often have two or more identical peak highs which allow for the horizontal line to be drawn. The trend line signifies the overall uptrend of the pattern, while the horizontal line indicates the historic level of resistance for that particular asset.
In contrast, a descending triangle signifies a bearish continuation of a downtrend. Typically, a trader will enter a short position during a descending triangle – possibly with CFDs – in an attempt to profit from a falling market.
Descending triangles generally shift lower and break through the support because they are indicative of a market dominated by sellers, meaning that successively lower peaks are likely to be prevalent and unlikely to reverse.
Descending triangles can be identified from a horizontal line of support and a downward-sloping line of resistance. Eventually, the trend will break through the support and the downtrend will continue.
The symmetrical triangle pattern can be either bullish or bearish, depending on the market. In either case, it is normally a continuation pattern, which means the market will usually continue in the same direction as the overall trend once the pattern has formed.
Symmetrical triangles form when the price converges with a series of lower peaks and higher troughs. In the example below, the overall trend is bearish, but the symmetrical triangle shows us that there has been a brief period of upward reversals.
However, if there is no clear trend before the triangle pattern forms, the market could break out in either direction. This makes symmetrical triangles a bilateral pattern – meaning they are best used in volatile markets where there is no clear indication of which way an asset’s price might move. An example of a bilateral symmetrical triangle can be seen below.
All of the patterns explained in this article are useful technical indicators which can help you to understand how or why an asset’s price moved in a certain way – and which way it might move in the future. This is because chart patterns are capable of highlighting areas of support and resistance, which can help a trader decide whether they should open a long or short position; or whether they should close out their open positions in the event of a possible trend reversal.