Chart Patterns & Probabilities (2024)

Chart patterns are distinct formations ona price chart of a financial-traded asset. There are many different types of chart patterns that are distinguished by a wide variety of unique features. When a chart pattern is confirmed, there is a high probability that a certain (upward/downward) price movement will occur, in the near future. A chart pattern is not able to predict with certainty a future price movement, however, it can indicate a high-probable trend reversal or continuation. Chart patterns are very useful in confirming the indications of other technical analysis tools such as MACD or RSI.

Two Categories of Chart Patterns (Reversal and Continuation Chart Patterns)

There are two major pattern categories -the Reversal and the Continuation Patterns. Reversal patternssignal theend of the current trend and continuation patternssignal that the price trend is likely to continue in the same direction.

(Α) MAJOR REVERSAL CHART PATTERNS

(1) Head and Shoulders Patterns

• Reliability: 7/10

The Head and Shoulders pattern is widely used among traders and is considered one of the most reliable reversal patterns. The timeframe of these patterns includes a few weeks to many months. There are two types of head and shoulders chart patterns (top/bottom).

(i)Head and shoulders top is a chart pattern that signals the end of an uptrend (on the left of the following chart)

• Success rate (≥ break-even): 81%
• Average decline: 16%
• Percentage meeting target: 51%

(ii) Head and shoulders bottom, or inverse head and shoulders, that signals the reversal of a downtrend (on the right of the below chart)

• Success rate(≥ break-even): 90%
• Average rise: 45%
• Percentage meeting target: 71%

(2) Double Tops and Bottoms Patterns

• Reliability: 4/10

Double tops and bottoms are very common patterns in financial markets. However, they are not considered reliable patterns. These patterns are confirmed when a price movement hits support or resistance levels twice but it is unable to pass through. The timeframe of these patterns includes a couple of weeks to several months.

(i)DoubleBottom

• Success rate(≥ break-even): 81%

• Average rise: 43%

• Percentage meeting target: 71%

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(ii)DoubleTop

• Success rate(≥ break-even): 73%

• Average decline: 14%

• Percentage meeting target: 45%

(3) Triple Tops and Bottoms Patterns

• Reliability: 5.5/10

Triple tops and triple bottoms are formed when the price tests the level of support or resistance three times in a row, and itis unable to pass through. Usually, when these patterns occur, thetrend reversal is extremely fast and strong. The timeframe includes a couple of weeks to a couple of months. Nevertheless, triple tops or bottoms can be also identified in longertimeframes.

(i) Triple Top

• Success rate(≥ break-even): 75%
• Average decline: 14%
• Percentage meeting target: 49%

(ii) Tripple Bottom

• Success rate(≥ break-even): 86%
• Average rise: 44%
• Percentage meeting price target: 72%

(4) Rounding Top and Bottom Patterns

• Reliability: 8.5/10

Rounding top and bottom patterns are also called Saucer patterns and are very reliable chart patterns. These patterns indicate a significantuptrend/downtrend reversal after a long consolidation period. The timeframe includes from several months to several years.

In many instances, rounding tops and bottoms can be explained by the Wyckoff accumulation/distribution model. » More about theWyckoff Method

(i)Rounding Top

• Success rate(≥ break-even): 87%
• Average decline: 19%
• Percentage meeting target: 13%

(i)Rounding Bottom

• Success rate(≥ break-even): 97%
• Average rise: 58%
• Percentage meeting target: 64%

(Β) MAJOR CONTINUATION CHART PATTERNS

(5) Cup and Handle Patterns

• Reliability: 9/10

The Cup and handle is a continuation chart pattern indicating that an uptrend has paused but it will not reverse. The name of the pattern is due to the fact that it looks like a cup. When a cup and handle chart pattern is confirmed the uptrend is getting stronger. This kind of chart pattern can be identified in a wide range of timeframes: from a few months to a couple of years. Note that there is also the inverted cup and handle that indicates the continuation of a downtrend. Both the bullish and bearish cup and handle patterns are extremely reliable.

Cupand Handle (bullish continuation)

• Success rate(≥ break-even): 95%
• Average rise: 52%
• Percentage price target: 62%

Inverted CupandHandle (bearish continuation)

• Success rate(≥ break-even): 83%
• Average decline: 17%
• Percentage price target: 62%

(6) Triangles Chart Patterns

• Reliability: 6/10

Triangles are very common patterns in the financial trading universe. There are three major types of triangles that can be identified: Symmetrical, Ascending, and Descending triangle. The timeframe of triangles includes a couple of weeks to several months.

Ascending Triangle(bullish trend)

• Success rate(≥ break-even): 83%
• Average rise: 43%
• Percentage meeting price target: 70%

Descending Triangle (bearish trend)

• Success rate(≥ break-even): 87%
• Average decline: 15%
• Percentage meeting price target: 50%

Symmetrical Triangle (bullish breakout)

• Success rate(≥ break-even): 75%
• Average rise: 34%
• Percentage meeting price target: 58%

Symmetrical Triangle(bearishbreakout)

• Success rate(≥ break-even): 63%
• Average decline: 12%
• Percentage meeting price target: 36%

(7) Flag and Pennant Patterns

• Reliability: 5/10

Flag and Pennant are continuation patterns signaling the continuation ofthe trend after a sharp advance or decline. For the confirmation of these patterns, a significant increase in the volume activity is required. The timeframe of Flag and Pennant patterns usually includes a couple of weeks to a couple of months.

Conclusions and the Important Role of Trading Volume

■ Spot Patterns on high timeframes (Daily and higher)

Chartpatterns can be identified in the chart of any financial asset (currency pair, stock/index, commodity, crypto, or even bonds), and in any timeframe. In general, patterns on high timeframes (Daily, Weekly, Monthly) are more reliable than patterns on low timeframes.

■ Volume is the key for validating any pattern in any timeframe

The key parameter to validate any pattern is trading volume. At the criticallevel where the price is closing to a breakout, volume must significantly increase. If trading volume at critical points is unchanged or even declining, then, there is a high probability for a fake pattern and a classic bear/bull trap.

■Chartpatterns should not be used in isolation

Chart patterns are very useful in confirming the continuation/reversal ofthe price trend. However, a chart pattern is not able to predict future price movements with certainty. After all, the word certainty is strictly forbidden in financial markets, at least for those who have experience.Chartpatterns should not be used in isolation, they should be used as a strong confirmation for the indications of other tools such as MACD, Support/Resistance, Fibonacci Retracement, etc.

Sources:

• Probabilities for all the above charts patterns by Thomas Bulkowski:http://thepatternsite.com/

■ Chart Patterns & Probabilities

by George Protonotarios forTradingCenter

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