The human brain is very good at identifying patterns and is also very good at identifying nonsense trading patterns on the chart.
In my eight nine years of trading journey, I have tried many different chart patterns.
But only a few of them were actually good.
The rest of them were complete nonsense.
So, I ranked the best and worst chart patterns in a tier list.
The things I’m going to put near the top of the list are good, and those near the bottom are bad.
Number 7.
I really like the story of the head and shoulders pattern.
I’m talking about the price movement story, not what happened to the rest of the body.
Basically, when you see a head and shoulders pattern, it’s saying that a good upward move was going on.
There was a higher-high uptrend pattern.
The buyers were strong.
But then the sellers took control.
Now, the price is no longer making a higher-high pattern; it’s making a lower-low pattern.
That pattern indicates downward pressure.
The head and shoulders pattern tells a story about buyers losing control and sellers taking over.
It’s a sign of a potential reversal move.
Many traders like to take a short trade after this pattern.
In most of my trading journey, I have directly identified reversals using the higher-high, lower-low pattern.
Like, instead of calling it a head and shoulders, I just saw the story of sellers getting stronger and a lower-low pattern starting.
I’m pretty sure it’s because I started as a price-action-only trader and learned higher-high, lower-low trend patterns first.
Overall, compared to the other things I’m going to put on the list, the head and shoulders pattern goes in the B tier.
Number 6.
When the price starts moving in a triangle shape, it creates a good setup for a breakout-like move.
For example, the price was moving more strongly up and down before.
But then the movement started compressing.
There will be traders taking trades in both directions during the formation of the triangle.
Many of them will set their stop-loss just outside the triangle.
The longer the price stays in a compressed, triangle-like pattern, the more stop-losses will accumulate outside the triangle.
When the price finally breaks to one side, these stop-losses will get triggered, automatically creating pressure in the breakout direction.
On top of that, new traders will also take trades in the breakout direction.
This can lead to a decent move in the breakout direction.
However, the breakouts are not always that clean.
There can be many false breakouts before the real one.
Market noise can also create false breakouts.
So, this pattern is better seen as price movement compressing, indicating there could be a short-term, breakout-like move soon.
When the triangle starts forming, you can also see it as a sign to avoid taking trades.
Like, the price is not moving much, so there is not much to trade.
You will probably be stuck in a trade for a while if you take one.
However, when I was mainly trading momentum on the stock market’s smaller timeframes, the price movement was cleaner compared to forex.
So, when I saw a triangle-like pattern after a strong, one-sided move and then the price gave a breakout, I saw it as a continuation of the previous momentum.
It was very helpful.
I will put it in the A tier.
Number 5.
I personally don’t like curved chart patterns, such as the Cup and Handle.
I mean, these kinds of patterns can be spotted in many random movements.
Like, even if a triangle appears in a random place, it just means that the price there is compressing.
But some of the other patterns, such as the cup and handle, don’t mean much.
It’s like one of those things where if you stare at the chart long enough, you will even start seeing tea and sugar, and then you can drink it.
Overall, curved patterns, such as the Cup and Handle, were not that useful in my trading journey.
If you find it useful, use it, of course.
I will put it in the D tier.
Number 4.
The flag pattern is one of my favorite patterns.
This almost looks like a triangle.
And just like a triangle, when I was mainly trading on smaller timeframes, I used the breakout of this flag as a sign of momentum continuation.
If you have seen previous Trading Rush videos, you probably remember me saying that the only trendline I really like is the one at the pullback of a trend.
This flag-pattern-type movement is one of the reasons for that.
The top line of the bullish flag pattern is a pullback trendline.
Whenever the price moved up strongly, gave a flag-like pullback, and then broke above it, I started looking for reasons to buy.
Overall, I like the flag pattern.
I will put it in the S tier.
Number 3.
Another favorite pattern is the double-top or double-bottom pattern.
This is useful on all timeframes.
It’s basically the price reacting from support and resistance areas.
I like to take reversal trades when it forms.
I will put it in the S tier.
Number 2.
The triple-top or triple-bottom pattern is just like the double-top or double-bottom.
The only difference is that the price is now reacting from the support or resistance area again.
It’s telling pretty much the same price story as before: people are reacting to the support and resistance.
So, I will put it in the S tier as well.
Number 1.
When the price keeps reacting to support and resistance for too long, it forms a rectangle-looking pattern.
This is a range market now.
There are mainly two kinds of trades taken with this pattern.
One is a reversal trade when the price comes near support or resistance of the range.
I tested a range market strategy like this a while back, and it got a good win rate.
The other way is to take a breakout trade.
However, immediately taking range breakout trades doesn’t work, according to previously tested data.
Waiting for the retest after a range breakout is much better.
Overall, the rectangle-looking price movement is very good if you are not a trend trader.
I will put it in the S tier.
I was going to rank the dinosaur pattern as well, but too bad they don’t exist anymore.
Thanks for watching.