Do you know the top 4 trading patterns?

Trading patterns or chart patterns are very important things to know about. But do you know the 4 most important ones? Let’s find out so you can improve your trading. So stop what you’re doing right now and read on.

Trading patterns are reproducible situations that improve your chances of trading profits. Let’s go!

All the trading patterns in one video

First, we’ve got a video that presents all the most important chart patterns. Do not forget to watch it:

When it’s done, here are the top 4 trading patterns.

The father of all chart patterns: Dow’s Waves

Certainly the most important, the Dows’s Waves is a chart pattern that identifies upward and downward trends. In trading, it’s very important, because one must trade with the trend!

Dow's wave in an uptrend. — *Dow’s wave for an uptrend*

So, a bullish trend is characterized by successive:

higher lows
and higher highs.

Whereas, a bearish trend is characterized by successive:

lower lows
and lower highs.

This chart patterns, or more precisely, rule, is the building block of all the rest. And, as a rule of thumb, do not enter long without bullish Dow’s waves.

Trends and reversals

So, now, we know how to detect trends. Well, but the markets are not made of bullish or bearish trends. Sometimes, you’ll encounter reversals;

In fact, imagine an uptrend. It is made of successive higher lows and successive higher highs (Dow’s Waves). What happens when this is no more respected? We get a reversal. And the 1-2-3 pattern is a famous pattern to detect a reversal.

1-2-3 pattern for reversal — *The 1-2-3 pattern is a reversal pattern*

Here is how it works.

(2) and (3) are respectively the last higher low and higher high in an uptrend. Then the price goes down under (2). this break of the (2) level signals a reversal.

The reverse exist for a bearish trend. Are you able to see the reversal? It is in read. The green and black ones are just standard Dow’s waves.

reverse 1-2-3 pattern — *Example of the reverse*

Now, do you see the last (3)? It is black and on the right of the previous chart. This configuration leads to the next chart trading pattern.

Trading pattern #3: cup and handle

After the Dow’s waves and the 1-2-3 pattern, one of the most important of chart patterns is the cup and handle. Why?

Because it detects a new start in an uptrend. When you cumulate a bullish trend and a news swing upwards, your probabilities of trading profits are great!

Cup and handle chart trading pattern — *Cup and handle chart pattern*

In fact, the cup and handle trading pattern is composed of a round bottom (the cup), a new low, and a new start (the handle). And this pattern is very important because it what happens when a new uptrend begins. But an even better pattern takes into account the volatility.

The VCP trading pattern

At last, our final pattern is the Volatility Contraction Pattern. A pattern popularized by Mark Minervini, author of “Trade Like A Stock Market Wizard: How to Achieve Superperformance in Stocks in Any Market” (affiliate link).

In fact, the Volatility Contraction Pattern is similar to the cup and handle, but with several cups. And the range of the round bottoms are successively smaller and smaller: the volatility contracts.

Mark Minervini's Volatility Contraction Pattern — *Mark Minervini’s Volatility Contraction Pattern*

Really, the volatility contraction helps because it shows that sellers are losing the battle against buyers and it helps placing a very near stop loss (under the last round bottom).

This trading pattern is the king of chart patterns. When you detect it, don’t hesitate.

How to further learn trading?

Now you’re a pro in chart patterns. The trading patterns have no more secrets for you. Try our Beginner Trader Sheets and our indicators.

Illustrations : canva & Charts: TradingView