So here are our top four consolidation chart patterns that are notorious for breakouts.
The first is a channel pattern and it can be bullish, moving in an upward direction, or bearish moving downwards
A channel chart pattern price consolidation centers around two parallel trend lines.
In a bullish example, buyers are accumulating at prices at the higher low, and sellers are failing at the highs.
So, you have two parallel trend lines moving upwards, the top trend line represents resistance and the bottom is support. Prices tend to break out within the pivotal support and resistance price levels. Moreover, a breakout is confirmed when trading volumes spike around these pivotal points.
“A channel chart pattern price consolidation centers around two parallel trend lines”
If volume spikes near support and prices move upwards, that is interpreted as a bullish signal in a channel pattern chart. Volume can also spike near support and the price can fall, in this scenario, it is a bearish signal
Look for changes in volume also near the top of the trend line, resistance. If volume spikes and prices fall that is interpreted as a bearish signal. If volume spikes and prices rise that is a bullish channel pattern chart breakout to the upside.
The head and shoulders pattern is second on the list of chart patterns, which is also notorious for reversal signals
They are made up of the left shoulder, the head, and the right shoulder, as you will notice from the image.
Combined with signs of exhaustion the head and shoulder chart pattern can be shorted below the neckline.
So, check your favorite charts and zoom in and see if you can spot the head and shoulders chart patterns.
“The head and shoulders pattern is second on the list of chart patterns, which is also notorious for reversal signals”
Third on the list of chart patterns is a flag pattern that has a flat top or bottom consolidation and it is often traders’ favorite pattern
Flag pattern usually tops off near an area of support or resistance. The battle lines in this pattern are very clear with buyers and sellers accumulating their positions in the anticipation of a breakout. Price forms a tight wedge making the breakout out of these patterns some of the most powerful breakouts making flag patterns among the most lucrative trades for frequent traders. See flag pattern chart.
“We recommend caution trading wedge formations without having the full picture” – Win Investing
The wedge formation is fourth on the list of chart patterns
Similar to the flag pattern, this formation consolidates towards a major breakout. However, indecision is more prevalent here as buyers and sellers are matched, and the direction of the expansion is less certain.
We recommend caution trading wedge formations without having the full picture.
So, four of the above chart patterns are essential for technical traders, they are widely traded and form the basis for price action trading.
We recommend combining these trading patterns with market action theory, volume analysis, and order flow analysis to pinpoint areas on the chart where buyers and sellers are likely to react. Look for a spike in volume near resistance and support levels.