10 Chart Patterns Every Pro Trader Should Know

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10 Chart Patterns Every Pro Trader Should Know

Published by First Information

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All rights reserved. No part of this book may be reproduced or transmitted in any form or by any
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the above email address.

Copyright © 2022 Vince Stanzione

Vince Stanzione has been trading markets for over 30 years and has shared
his knowledge and experience in a number of books. He is the New York Times
bestselling author of The Millionaire Dropout and has created the “Making Money from
Financial Spread Trading” course. He has been quoted and featured favourably in
over 200 newspapers, media outlets, and websites, including CNBC, Yahoo Finance,
Marketwatch, Reuters, Independent, Sunday Independent, Observer, Guardian, The
Times, Sunday Times, Daily Express, What Investment, Growth Company Investor, New
York Times, Bullbearings, City Magazine, Canary Wharf, Institutional Investor China,
and Shares Magazine. Vince Stanzione, the author and publisher of this guide, is a Deriv
client and affiliate and may receive a commission on financial products offered by Deriv.

He is a self-made multi-millionaire who mainly lives in Mallorca, Spain, and trades

financial markets, including currencies, stocks, and commodities. For more information,
visit www.fintrader.net and follow him on Twitter @vince_stanzione.
10 Chart Patterns Every Pro Trader Should Know

CONTENTS

Chapter 01. Introduction to technical analysis 6

Why chart patterns should be considered 8

Candlestick charts 10

Popular time frames 12

Chapter 02. The 10 chart patterns you should know 13

Pattern 1 — Head and shoulder 14

Pattern 2 — Inverse head and shoulders 15

Pattern 3 — Double bottom 16

Pattern 4 — Double top 17

Pattern 5 — Cup and handle 18

Pattern 6 — Rounding top 19

Pattern 7 — Rounding bottom 20

Pattern 8 — Ascending triangle 21

Pattern 9 — Descending triangle 22

Pattern 10 — Wedges: rising and falling 23

Final words 25

Glossary 27
10 Chart Patterns Every Pro Trader Should Know

CHAPTER 1
Introduction to
technical analysis
10 Chart Patterns Every Pro Trader Should Know

INTRODUCTION TO TECHNICAL ANALYSIS

There are hundreds of chart formations and technical indicators. Volumes have been written
on the subject, some good and many long, confusing and contradictory. My aim here is to give
you 10 chart patterns that you will encounter in everyday trading, whether you are trading
stocks, commodities, forex, synthetics, or cryptocurrencies. You will find that these patterns
have historically appeared and can consider them in making your trading plan.

Chart patterns are a guide, not a

guarantee
DISCLAIMER It’s important to realise that chart patterns
and technical analysis are a guide, not a guar-
There is no guarantee that antee. I would love to tell you that these chart
analysing the market’s patterns will work every time, but sadly they
past performance, whether will not.
on financial or synthetics, The aim is to look for a trading edge, some-
can lead to successfully thing that helps you make a better trading de-
predicting future market cision and, over time, might bring you success
in financial markets.
movements. These technical
analysis tools merely help Chart patterns also help reduce emotions in
trading, giving you a roadmap as to when to
to understand how markets
enter a trade and, more importantly, when to
move and how such data
exit. In a fast-moving market — especially if a
can be analysed for a better- trade is moving against your prediction — logic
informed decision when and common sense can go out of the window,
trading. Please remember so having a trading plan and being aware of
that trading always involves what pattern a market adopts can really help
your trading results since you’ll then be in a
risk, and you should
better position to recognise a losing trade and
consider this when trading.
let go of it.
The word market in this book can easily refer
to a forex pair, stock, index, or cryptocurrency.

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10 Chart Patterns Every Pro Trader Should Know

Garbage in, garbage out — the importance of good data feeds

It’s worth remembering that as technical Staying with the most liquid markets, such
analysis relies purely on data (numbers), your as major currencies, indices, larger cap
data feed should be clean, and you must be individual stocks, commodities (major
aware of data spikes or data issues. If the ones are oil and gold), and the major
price is 11,12,13 and then the next price is cryptocurrencies can help you avoid pricing
100, it is likely to be a data issue. The charting issues that lead to inaccurate charts.
package, in most cases, will not know, so that Good data feeds will normally correct price
is where your common sense has to take over. spikes or erroneous data, but this can
It’s also worth noting that “illiquid markets” sometimes happen hours after the event.
— those of stocks or financial products that do
not trade actively — are prone to spiking data
and unsuitable for chart patterns or technical
trading.

Example of an illiquid stock

Here we see many gaps and days when the stock does not trade. This is not a suitable stock for
using chart patterns.

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10 Chart Patterns Every Pro Trader Should Know

What is technical analysis?

Technical analysis ignores the news and We would start with a basic price chart which
economic data, focusing purely on price trends would show the market trading price in the
and volume. It primarily involves studying past, and look for a trend or pattern that could
chart patterns, showing the trading history help determine future pricing.
and statistics for whatever market is being In this guide, I am skipping over indicators
analysed. and tools such as Moving averages, RSI or
Even traders who prefer a fundamental MACD and only focusing on actual chart
analysis driven by company news, earnings, patterns.
and valuation ratios sometimes use technical Of course, technical indicators can also be
analysis afterwards to determine a good combined with chart patterns.
entry price.

Why chart patterns should be considered

If I showed you a spreadsheet of prices in previous price level.
numbers, chances are you will not see a Thanks to the internet, it’s now easier than
pattern; however, if those same numbers are ever to find chart patterns. Many sites will
displayed in a chart, it is far easier to make offer screeners which allow you to filter for
sense of what is happening in a market. chart patterns. I use finviz.com
Chart patterns put all buying and selling that’s As you can see, I can select major patterns and
happening in a financial market into a concise then see all the stocks that meet that criteria.
picture. It is possible to see buyers (bulls) and
bears (sellers) take or lose control of a market.
This can help you to identify a trend reversal.
Chart patterns are a pure expression of what is
going on in the underly market. You or I could
think something is overvalued or undervalued,
but a chart pattern is purely price-driven. A picture tells a 1,000
Chart patterns tend to repeat themselves words
over and over again, which helps to appeal
to human psychology and trader psychology
in particular. It is common to see a market
move to a round number or find support at a

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10 Chart Patterns Every Pro Trader Should Know

Source: finviz.com
Here I can screen chart patterns, saving hours of manual screening.
Before diving into individual chart patterns, let’s first learn more about charts and timeframes.

9
10 Chart Patterns Every Pro Trader Should Know

Candlesticks charts
In the chart patterns used in this ebook, If the asset has closed higher than it opened,
we will use candlestick charts, presumably the body is white or green. The opening price
developed in the 18th century by the is at the bottom of the body. The closing price
legendary Japanese rice trader Homma is at the top. If the asset has closed lower
Munehisa. The charts gave Homma and than it opened, the body is black or red. The
others an overview of open, high, low, and opening price is at the top. The closing price
close market prices over a certain period. is at the bottom. A candlestick need not have
This method of charting prices proved to be either a body or a wick.
particularly interesting and helpful due to The most common colours — and the ones
its uncanny ability to display five data points I use — are red for a down candle and green
at a time instead of just one. Charles Dow for an up candle. White for an up candle and
picked up the method circa 1900, and today’s black for a down candle are also used, a
financial market traders still widely use it. custom that goes back to the days of printing
Candlesticks are usually composed of a body out charts in black and white.
and wick. The body, typically shaded in black/
red or white/green, illustrates the opening
and closing trades.
The wick, consisting of an upper and lower
shadow, shows the highest and lowest traded
prices during the time interval represented.

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10 Chart Patterns Every Pro Trader Should Know

Here we see an example of Tesla (TSLA) using a candlestick chart where each bar represents
one day of trading, green the stock closed up and red the stock closed down. This is the raw
chart to which we can add chart patterns and indicators, as I shall explain further in the ebook.
Source: TradingView. 2

Log in to your account to practice as you learn

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11
10 Chart Patterns Every Pro Trader Should Know

Popular time frames

Depending on what time frame you look at, 1 week is a time frame that allows you to see
the market may give contradictory buy and a longer-term pattern. Of course, it’s more
sell patterns. For example, if you look at the delayed and not as responsive, but it can
S&P500 on a 1-minute chart it will look very provide a good picture of a longer-term trend.
different to the S&P500 on a 1-day, 1-week, 1 month is a time frame that gives you a long-
or 1-month chart. term view of a market with years of data being
1 minute — a very short term — is a time visible on a chart. One-month chart patterns
frame that gives many buy and sell signals. often signal a serious trend change.
Since it is oversensitive, it can lead to false There are other time frames, but these tend
signals. The advantage is that signals react to to be the main ones I use. The examples in
market moves very quickly. Therefore, there is this ebook are based on daily charts unless
little lag time. stated otherwise, but they can also be used
1 hour is a popular time frame and helps on short or longer-term charts.
reduce the oversensitivity issues of a
1-minute chart.
1 day is the most commonly used time frame
and the one I mainly use. Each candle on a
1-day chart represents a trading day. It is
suitable for those not watching a screen all
day, doesn’t have the oversensitivity of short-
term movements, and catches all major trend
changes.

12
CHAPTER 2
10 Chart patterns
you should know
10 Chart Patterns Every Pro Trader Should Know

Pattern 1 - Head and shoulders

The popularity of this pattern is mainly attributed to the fact that it is easier to spot than other
patterns.
The head and shoulders pattern tries to predict a reversal. Characterised by a large peak with
two smaller peaks on either side, all three levels fall back to the same support level as the
neckline. The trend is then likely to break out in a downward motion.
Its name comes from what the pattern looks like: a head and two shoulders (and a neckline).
With this pattern, you would enter a short or sell trade below the neckline and a stop around
halfway between the second shoulder. The target move would be around the distance between
the head (peak) and neckline.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 2 - Inverse head and shoulders

The inverse head and shoulders or reverse bottom is a bullish pattern and indicates that sellers
have been exhausted. You would enter a long trade just above the neckline and a stop towards
the recent low of the second shoulder. The target would be a continuation of the head move
giving a fairly good risk-to-reward potential.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 3 - Double bottom

A double bottom looks similar to the letter W and indicates when the price has made two
unsuccessful attempts at breaking through the support level. It is a reversal chart pattern as
it highlights a trend reversal. After unsuccessfully breaking through the support twice, the
market price shifts towards an uptrend. You will also see triple bottoms play out.
Here we see the initial decline and attempt to rally, a second decline, which does not go below
the first decline, forming support. You would buy just above the neckline and stop towards the
middle of the up move, with a target at the same level that the initial decline started at.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 4 - Double top

Opposite of a double bottom, a double top looks like the letter M. The trend enters a reversal
phase after failing to break through the resistance level twice. If the price fails to move higher,
then it is likely to go back to the neckline, which is support. If it fails there, it will move lower
back down to the lows of the recent move. In this type of setup, you would look to take a short
trade with a stop above the neckline, and your target would be the recent lows.
It’s worth adding that you will also find multiple bottoms (support) or tops (resistance) in
markets, so you could see a triple top or triple bottom.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 5 - Cup & handle

The cup and handle is a continuation stock chart pattern that signals a bullish market trend.
It is the same as the rounding bottom or saucer (also a pattern worth looking out for) but
features a handle after the rounding bottom. The handle resembles a flag or pennant and once
completed, you can see the market break out in a bullish upwards trend.
The handle is a temporary retracement pattern and breaks out to continue the move higher.
This pattern can be fairly rare and takes time to complete; however, the upside move can be
fairly explosive. The move-up is often the same distance as the cup height, so once the handle
completes the next move higher, it gives us a target move of the same distance as the cup.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 6 - Rounding top

A rounding top usually indicates a bearish downward trend. It tends to show that the market is
losing strength, with each high being lower than the previous one. We then see a move through
the neckline as support fails, then we see a smaller retest (bounce) back to the neckline before
a larger fall. The fall is normally the same distance as the recent high to the neckline. I have
often seen this pattern in cryptocurrencies such as Bitcoin.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 7 - Rounding bottom

The flip side of the rounding top is the rounding bottom, which is a bullish pattern. The market
is in a downtrend but then starts to make a series of lows, higher than the previous ones, which
form the rounded bottom or saucer. We then break out of the cup and move higher.
You would look to buy around the halfway point of the formation of the U shape or once the
breakout occurs.
A rounded bottom can take weeks to form, but you can use a stock screening site to identify
a selection of stocks and markets that make this pattern and add them to your watch list. You
would only open trades once you are heading to the breakout point.
This is very similar to the cup and handle pattern previously covered.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 8 - Ascending triangle

The ascending triangle is a bilateral pattern meaning that the price could break out from either
side. A breakout is likely where the triangle lines converge. To draw this pattern, you need to
place a horizontal line (the resistance line) on the resistance points and draw an ascending line
(the uptrend line) along the support points. This pattern shows the price moving into smaller
and smaller ranges before the big break out. Your buy entry would be just above the resistance,
with a target the same distance as the triangle’s height.
For the sell entry, you would do the exact opposite, sell below the support line, and expect a
drop of at least the triangle’s height.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 9 - Descending triangle

The descending triangle is a bilateral pattern, meaning that the price could break out from
either side. A breakout is likely where the triangle lines converge. To draw this pattern, you
need to place a horizontal line (the support line) on the support points and draw a descending
line (the downtrend line) along the resistance points. This pattern is the exact opposite of the
ascending triangle previously covered.
This pattern shows the price moving into smaller and smaller ranges before the big breakout.
Your sell entry would be just below the support line, with a target the same distance as the
triangle’s height.
For the buy entry, you would do the exact opposite, buy above the resistance line and expect a
rise of at least the height of the triangle. You can place a stop just below the resistance line.

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10 Chart Patterns Every Pro Trader Should Know

Pattern 10 - Wedges: rising and falling

Our final patterns are wedges, and we will deal with rising and falling wedges.

Rising wedge
Wedge patterns are normally reversal patterns. A rising wedge occurs when the price makes
multiple swings to new highs, yet the price waves are getting smaller. Essentially, the price
action is moving in an uptrend, but contracting price action shows that the upward momentum
is slowing down. Eventually, the price breaks out, and in the case of the rising wedge, the price
moves lower.
You would enter a stop just above the wedge, and you would enter short. Place your sell trade
just below. The target would be a move-up of the same distance as the height of where the
wedge started.

Falling wedge
The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move
lower. The trading range becomes tighter and tighter until it breaks out. In the case of the
falling wedge, the price normally breaks higher, so it is a bullish pattern. You would have a stop,
as shown on the chart just below the wedge. You would buy just as we break out of the pattern
and then look for a target of the same distance as the height of where the wedge started. Take
care as many confuse a falling wedge with a bearish pattern.

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FINAL WORDS
10 Chart Patterns Every Pro Trader Should Know

I hope you have found this short guide of value and can use
these patterns to help you make better trades. As stated at the
outset, technical analysis and chart patterns are a guide, not
a guarantee. Chart patterns can be viewed as a tool in your
trader’s toolbox together with indicators such as RSI, MACD, and
moving averages.

Chart patterns help you keep your trading decisions focused and
disciplined, especially in fast-moving and volatile markets.

Before investing, you can use a demo account to try your new
skills without risking any funds.

Most brokers offer a demo account free of charge. You can sign
up for a Deriv demo account, for example, and use their many
charts and trading tools.

As for trading software and websites, there are many that

will automatically add chart patterns to a chart and allow
screenings. With time, you will be able to spot chart patterns as
your eyes become accustomed to them.

I wish you every success in your trading.

Vince Stanzione

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GLOSSARY
10 Chart Patterns Every Pro Trader Should Know

Accumulation Candlestick charts

Accumulation occurs when a stock or market A chart that has open, high, low, and close
is being purchased at higher prices. Stocks data sets in a candle form.
whose prices are rising are considered to be
under accumulation. Opposite of distribution. Charting
The study of historical price patterns or
Ask price actions to determine likely future movements.
The price that you can buy at. Also referred to
as buy or offer price. Opposite of bid price. Chart patterns
Price patterns are trends that occur in stock
Bearish charts. The patterns form recognisable
This refers to a market in decline. Someone shapes. The common ones are covered in this
with a negative view of a market would be a ebook.
Bear.
Continuation patterns
Bid price Most chart patterns can be broken down
The price that you can sell at. Also referred to into two categories — continuation patterns
as sell price. Opposite of ask/offer price. or reversal patterns. Continuation patterns
continue the trend that was in place prior to
Bilateral pattern the development of the continuation pattern.
The bilateral pattern means that the price A cup and handle pattern covered earlier is a
could break out on either side. An example continuation pattern.
of a bilateral pattern is an ascending or
descending triangle. Distribution
Distribution occurs when a stock or market
Breakout is being sold at lower prices. Stocks whose
A sustained move through a support or prices are falling consistently are considered
resistance line. As a rule of thumb, this should to be under distribution. It’s the opposite of
consist of more than one day’s price action. accumulation.
The subsequent move can be powerful. A
breakdown would be where a support area Downtrend
gives way, and the price moves lower. A downtrend is a sequence of lower lows and
lower highs. It’s the opposite of an uptrend.
Bullish
This refers to a market that is rising. Someone Head and shoulders
with a positive view of a market would be a Bull. Three-pronged chart formation resembles a

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10 Chart Patterns Every Pro Trader Should Know

head and two shoulders, where the second plotted as a horizontal line touching previous
peak marks the extreme of the trend. The highs. Can appear at psychological levels, i.e.
third peak fails to extend beyond the second. big round numbers such as $100 or $1,000.
The pattern is completed by a break of the Resistance can be seen as a ceiling, and it’s
“neckline”, signalling a trend reversal. See the opposite of support.
also the “inverse head and shoulders” chart
pattern or market bottoms. Reversal patterns
Reversal patterns reverse the trend that
Inverse head and shoulders was in place prior to the development of the
The inverse head and shoulders or reverse reversal pattern.
bottom is a bullish pattern and indicates
sellers have been exhausted. Characterised Rounding bottom
by a large peak downwards with two smaller Rounding bottom is a chart pattern that shows
peaks on either side, all three levels rise back the gradual base formation and the turn to
to the same resistance level in the neckline. an uptrend, especially a good long-term base
The trend is then likely to break out in an formation. See also rounding top.
upward motion.
Rounding Top
Illiquid markets A rounding top usually indicates a bearish
Any market that doesn’t have immediate price downward trend. It tends to show that the
discovery, volume, or wide bid/ask spreads is market is losing strength, with each high being
an illiquid market. Basically, an illiquid market lower than the previous one. We then see a
is the absence of liquid assets. move through the neckline as support fails,
then we see a smaller retest (bounce) back to
Moving average the neckline before a larger fall.
The average price of a stock/market over
any given (rolling) period of time. It is used Screener
primarily as an indication of a trend and is A piece of software or website that allows you
less useful in rangebound markets. A moving to scan or screen markets or stocks for a set
average is usually plotted at the end of the of rules or trading patterns. Also known as a
time period covered but can be centred or filter.
shifted as required.
Sideways trend
Resistance Markets that trade in a range are in a sideways
A level where sellers are found. Usually trend.

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10 Chart Patterns Every Pro Trader Should Know

Support
A psychological, fundamental, or technical
level that limits selling in a stock or market.
Often described as a point where there are
more buyers than sellers. Support is seen
as a floor in the price and is the opposite of
resistance.

Technical analysis
Technical analysis is the study of historical
price action to determine future movements,
usually with the use of charts. It’s the
opposite of fundamental analysis.

Triangle pattern
The triangle pattern is in the form of a triangle.

Uptrend
An uptrend is a sequence of higher highs and
higher lows. It’s the opposite of a downtrend.

You can download the chart

patterns here.

29
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