Common Trading Patterns Cheat Sheet, How to Trade Them

Why Use Trading Patterns?

You may have heard trading patterns before. You may have heard that they’re successful, or you may have heard that they don’t work. Both are true. Trading patterns work great for some people, but not others. The reason comes down to work and effort.

Trading is not as easy as reading an article, opening your trading platform, and then making easy money for the rest of your life based on what you learned. Trading patterns occur all the time in a general structure, but each one is slightly different than the last.

Patterns are never exactly alike, which means it takes practice to spot patterns. Once you have spotted them, you can look at how this pattern is similar to patterns that have worked or not worked in the past, and you decide if you want to trade it.

This process takes work. But what is the trade-off? Becoming a specialist in even one trading pattern means you could potentially make a living off the market. I have been a professional day trader and swing trader since 2005, and I make a living off the patterns covered in this article.

So trading patterns do work, but you will want to find and analyze hundreds of them. Look for qualities that you tend to see the most in the winning trades, and then look for those same qualities in the new chart patterns you find.

Triangles Pattern Cheat Sheet

A triangle trading pattern looks like a triangle as price swings get smaller and smaller over time. When the price breaks out of the pattern, it signals a move in the breakout direction but favors trading breakouts in the same direction as the trend.

A triangle in an uptrend forms when the price rallies making a high (1) and then pulls back (2). The price then moves up and down, but only within the confines of points 1 and 2. For it to be a triangle, the highs and lows of each price must get closer together. Here is an example on a 2-minute chart.

The price rallies into point 1 and then pulls back. The price rallies again, but doesn’t move above point 1 (though a slight move above is allowed). The price pulls back and stays above point 2.

We can now see a triangle forming. The price rallies again and slightly exceeds the prior high, but not point 1. The price drops and moves higher again before reaching the prior low (and well above point 2).

Point 1 has become a resistance level and point 2 is a support level.By this point, there is a clear contraction in price. Price waves are getting smaller, and we have a triangle.

Entering and Managing Risk on a Triangle Pattern

There are a few different ways to enter a triangle. The best way is the one that works for you after finding and studying many of these patterns.

To utilize this pattern, buy when the price makes a new swing high (or low if the trend was down leading into the triangle). Place a stop loss below the prior swing low of the pattern. Triangles are often continuation patterns, so we ideally want to trade in the overall trend direction.

Buy near the bottom of the triangle once the price starts moving up. Look for it to move above the high of a prior candle. For this, buy on the third low point of the pattern or after (see chart example below).

I call this second pattern “front running” because we are buying near the lows of the pattern in anticipation of the price eventually moving higher in alignment with the overall uptrend.

Taking Profits on Triangle Patterns

The most common profit-taking method with triangles is to use a profit target. A target, which is a limit order, is a sell order that gets us out of our long position if the price reaches a specified level (or a buy order that gets us out of a short position).

Here is a common way to get a profit target on a triangle:

• Measure the height of the triangle at its widest part. That’s the high to the pullback low, in our example. Add that height to the top of the triangle trendline.

• If going short, subtract the height of the triangle from the bottom of the triangle pattern.

Double Top and Bottom Pattern Cheat Sheet

The double top or bottom is a trend reversal pattern. A double bottom is when the price is dropping, then pulls back, drops to a similar low, and then rallies above the pullback high.

A double top is when the price is rallying and then pulls back. It then rallies back to a similar price as the high before dropping below the pullback low. This is a bearish reversal pattern, as it signals a reversal in price to the downside.

The double top and bottom show a change in price behavior. The double top shows the price can no longer rally to higher highs, and is now making lower lows. The double bottom shows the price is no longer dropping to lower lows, and is now making higher highs.

Below we’ll see an example of a double bottom in Apple stock. The price is dropping into the first low then bounces. When it drops again it only makes it to a similar low before rallying above the pullback high. Another double bottom forms shortly after the first.

The second pattern is what I call a Double Pump because this double bottom is occurring within an uptrend. Because we have the added information of the uptrend, we can enter sooner – like right around November 15 on this chart – which is earlier than the typical entry a few days later.

Entering and Managing Risk on a Double Bottom or Top

Here is where to enter and place a stop loss on a double top or double bottom trade.

• For a double top, enter a short trade as the price drops below the pullback low. Place a stop loss above the recent high.
• For a double bottom, enter long as the price rallies above the pullback high. Place a stop loss below the recent low of the pattern.

Ideally, smaller patterns are better for trading, because then the stop loss is smaller. If you use a huge double or top pattern, then your stop loss will be equally as large, thus making it harder to make a profit that is bigger than the stop loss (because of course overall, we want our profits to be bigger than our losses).

Double Top and Bottom Profit Targets

Here’s how to determine the profit target for a double top or bottom trade.

• For a double bottom, add the height of the pattern to the top of the pattern.
• For a double top, subtract the height of the pattern from the bottom of the pattern.

On the chart below, I have stacked a second arrow (the same size as the first) on top of the first arrow to show the distances.

You will notice that this means your profit target is roughly equal to your stop loss size. As we mentioned earlier, you want your wins to be bigger than your losses, so you can look for entries or stop loss locations that provide this.

Alternatively, go for larger targets, such as double the size and the height of the pattern. Alternatively, you can utilize the Double Pump method, which provides an earlier entry which means a smaller stop loss relative to the typical profit target.

Rounded Top and Bottoms Pattern Cheat Sheet

A rounded top or a bottom is a gradual shift in the trend. With a rounded top the price is moving up, flattens out, and then starts moving lower. This is a bearish chart pattern.

With a rounded bottom, the price is dropping, flattens out, and then starts moving higher. This is a bullish chart pattern. Remember that with the rounding patterns, it is a gradual process, not a quick change. The following Tesla daily chart shows an example of a rounded bottom pattern.

We can see that the price is dropping on the left of the pattern, marked with red lines. Then it becomes harder to determine the trend, as up and down moves are roughly equal in size. This area is marked with blue lines. Gradually, we start to see a transition to the upside, with the price making higher swing highs and higher swing lows.

Once this shift to the upside occurs, it is time to look for a buy point (or sell/short point if it’s a rounded top). I tend to see rounded bottoms much more than rounded tops, so I end up trading them more often.

Rounded Bottom Entries and Risk Management

This is my favorite entry and stop loss strategy for the rounded bottom.

• Wait for the price to make a higher swing high. Then, await the next pullback. When it starts to turn higher again above the prior swing low, enter a long position with a stop loss below the prior swing low.

Rounded Bottom Profit Target

When the rounded bottom completes, large price moves can ensue. At that point, it is still good to have a price target in mind so you can extract profit if the price rallies.

• Add the height of the “flat part” (the blue lines) of the rounded bottom to the top of the rounded bottom. The top of the pattern is when we get the shift to the upside. So it’s the high prior to the new swing high (the high in blue in our example).

On the chart below, I have drawn two boxes exactly the same size to show that the distance the rounded bottom covers is likely to be replicated above the pattern. The top of the upper box is a good profit target.