When multiple candlesticks align on a price chart, they form shapes that reflect future price movements. These shapes are known as repetitive classic patterns. Classic patterns are divided into two categories: reversal patterns and continuation patterns.
Application of Classic Patterns
Due to their repetitive nature, classic Chart patterns are used to predict future price movements. Since they clearly define highs and lows, these patterns are helpful in identifying entry points and setting stop-loss levels in the Forex market, stock market, and cryptocurrency.
Reasons for Using Classic Patterns
Although classic Chart patterns are traditional methods of technical analysis, they are still widely used in financial markets due to:
- Simplicity in identification
- Compatibility with other analytical tools, such as indicators, trading volume, and candlestick patterns
Reliable Chart Patterns
Classic Chart patterns are categorized into Reversal Patterns and Continuation Patterns.
Reversal Patterns
These classic patterns indicate a weakening of the current trend and a potential trend reversal.
Head and Shoulders
The Head and Shoulders reversal pattern signals the end of a trend and a possible change in price direction. This pattern consists of one larger middle peak (or valley) and two smaller side peaks (or valleys).
The pattern is more reliable in medium to long term timeframes, as the price must be in a strong trend before forming the pattern. It is most visible in H1, H4, and Daily timeframes.
Double Top & Double Bottom
A Double Top forms two consecutive peaks at a resistance level, signaling a bearish reversal. Conversely, a Double Bottom forms two troughs at a support level, indicating a potential bullish reversal.
The pattern is commonly seen in short to medium term timeframes, particularly in 30-minute to 4-hour charts (M30, H1, H4), as it often forms after a strong price wave.
Triple Top & Triple Bottom
A Triple Top forms when the price hits resistance three times but fails to break through, signaling a potential downtrend. Conversely, a Triple Bottom occurs when the price bounces off support three times, strengthening the probability of an uptrend.
The pattern is more prominent in medium to long term timeframes (H4, Daily, Weekly), as price requires multiple attempts to breach support or resistance.
Rounding Bottom & Rounding Top
A Rounding Bottom appears as a gradual downward movement that slowly turns upward, forming a semi-circular shape at the bottom, indicating an uptrend.
A Rounding Top forms a smooth arc at the peak of a price movement, signaling a downtrend.
Due to their slow formation, these patterns typically appear in long term timeframes (Daily and Weekly).
Continuation Patterns
Continuation classic patterns indicate the continuation of the trend after a short correction.
Flag
The Flag pattern is a short-term continuation pattern that forms after a substantial price movement (flagpole). It consists of a small channel moving in the opposite direction of the primary trend and breaks out in the direction of the previous trend.
The Flag pattern is most useful for scalping and day trading in short to medium term timeframes (M5, M15, M30, H1).
Symmetrical Triangle
The Symmetrical Triangle is a continuation Classic chart pattern in which the price fluctuates within a narrowing range. It consists of two converging trendlines and usually leads to a breakout.
Ascending & Descending Triangle
An Ascending Triangle has a horizontal resistance and rising lows, often resulting in an upward breakout.
A Descending Triangle has a horizontal support and declining highs, signaling a potential downward breakout.
Wedges
Wedges include Rising Wedge and Falling Wedge, typically forming in high-momentum trends.
- Rising Wedge slopes upward and usually results in a bearish breakout
- Falling Wedge slopes downward and typically breaks out bullish
Rectangle
The Rectangle pattern indicates sideways price movement where the price oscillates between support and resistance before breaking out.
Advantages and Disadvantages of Classic Patterns
These patterns, like all trading strategies, have their own advantages and disadvantages:
Advantages | Disadvantages |
Simple visual identification | Possibility of fake breakouts |
Usable in all financial markets | Requires confirmation with indicators and volume |
Compatible with other analysis tools | Delayed signal confirmation |
Enhancing Trend Identification with Classic Patterns
To identify strong trends, merely recognizing classic chart patterns is not enough; attention must also be given to how they form within the market liquidity flow.
Combining the analysis of highs and lows structure with candlestick behavior and trading volume can provide confirmatory signals for entering or exiting trades.
- Pattern Shape: Analyze how price forms highs and lows
- Candlestick Charts: Identify buyer/seller pressure
- Volume Analysis: Increasing volume on a breakout confirms the pattern
- Confirmation with Technical Indicators: Uses RSI, MACD, and Moving Averages
- Multiple Timeframe Analysis: Ensure reliability across different timeframes
Combining Classic Patterns with Common Indicators
Classic chart patterns frequently appear in all financial markets, but they have inherent weaknesses that can be mitigated by combining them with other trading strategies.
Using the RSI Indicator to Confirm Signals
The RSI indicator can be used alongside classic patterns to identify overbought and oversold zones. For example, if RSI is in the oversold zone and a Double Bottom pattern forms, the likelihood of a trend reversal increases.
Combining Classic Patterns with the MACD Indicator
The MACD indicator helps confirm the breakout of classic chart patterns by analyzing divergence and convergence. If a Head and Shoulders bearish breakout aligns with a MACD bearish crossover, the probability of continued price decline strengthens.
Conclusion
Classic patterns include Reversal Patterns (e.g., Head and Shoulders and Double Top/Bottom) and Continuation Patterns (e.g., Flags, Triangles, and Wedges).
Combining the patterns with candlestick analysis, volume indicators, and momentum tools like RSI and MACD enhances accuracy and reduces false signals.
