Trading Education

Day trading patterns you should track in TradeZella

The ability to analyze price charts to identify trends is one of the most important parts of being a successful day trader. Let’s look at 12 of the best day trading chart patterns, and why you should track them using TradeZella.

June 28, 2023
16 minutes

Being a successful day trader is about more than good luck and intuition. It’s about using in-depth technical analysis to find opportunities that will pay off quickly. One of the most powerful ways to do this is by using chart patterns. 

Chart patterns can help you figure out when to buy and sell based on how the market has behaved in the past.

Obviously if it was as easy as following one set pattern, everyone would be making millions in day trading.

But there are lots of different patterns, and experienced day traders need to be able to identify them in order to maximize win rates and, ultimately, profits.

Memorizing them all might sound like hard work, but really they’re all variations on a similar theme.

Chart patterns tend to indicate when a breakout is about to happen – either high or low – and can help you work out whether a market reversal is about to take place.

While past market behavior doesn’t guarantee repeat performance in the future, it’s always good to know the signs – especially if you’re entering and exiting positions quickly as a day trader.

Once you know a few of the best day trading patterns, you should be able to start observing what’s going on – and drawing them onto your TradeZella charts.

From here, you should find yourself making more informed decisions, leading to more consistent profits.

So, let’s look a bit deeper into day trading, price charts and a few of the most important patterns that successful traders track.

Let’s start with the basics: what is day trading?

Photo by Anthony Riera on Unsplash

Day trading is a fast-paced style of trading where assets (usually stocks and forex) are bought and sold during the same trading day.

This takes advantage of quick changes in prices and other market inefficiencies.

Day traders don’t play the long game, or hold stocks in anticipation of long-term price rises. Instead they keep a keen eye on the market and try to find the very best entry and exit points.

There are a couple of different strategies for day trading. For example scalpers, who enter and exit super-quickly – we’re talking within one minute to half an hour.

While some people can make successful snap decisions, and do really well at this type of trading,  it’s generally considered best to keep positions open for more than 15 minutes. At least while you’re starting out, anyway. 

There’s also ‘news trading’, where day traders keep a close eye on global news alongside their technical analysis.Knowing how world events can affect the market helps this type of trader make informed decisions. 

Another strategy is range trading, which relies on charts showing predetermined support and resistance levels to inform decisions. For this type of day trader, it’s super important to have good knowledge of chart patterns.

And then there’s high-frequency trading, which uses algorithms to notice short-term inefficiencies in the market.

Whether you’re starting out as a day trader, or already have some experience, it’s super important to have a good trading strategy in place backed up by technical analysis.

After all, you’re unlikely to make consistent profits if you’re just pulling stocks out of thin air. 

Why do you need to use chart patterns for day trading?

As you can imagine, day trading can be really complex. It’s risky and takes a lot of skill to avoid the common mistakes – and it’s definitely not the magic money-making bullet that some people would have you believe!

Of course, some people do make incredible profits as day traders. But they put in the work with in-depth analysis and know that even the best strategy can be fallible at times.

To be a successful day trader, you need to do your homework. As well as having lots of self-discipline and an objective mindset – things that keeping a trading journal can help with – you also need to undertake lots of technical analysis of price movements.

This is where chart patterns come in.

Day traders need to use a range of techniques and strategies to get in and out at the best points.

Having an understanding of chart patterns is key to being able to predict the market somewhat accurately. 

What is a price chart for day trading?

Now that you understand how important price charts are for your journey as a trader, you’re probably wondering what exactly they are.

Put simply, a price chart is a visual way to see market and trading activity over a certain period – it could be five minutes, 30 minutes, one hour or longer. 

On any given chart, there are lots of data points to look out for. Key ones are:

  • Opening price
  • Highest price
  • Lowest price
  • Closing price.

Stock and forex traders tend to use three types of chart to track data: line, bar and candlestick.

Line chart

Line charts use a single line to connect the closing price data across your chosen time period.

This is the most basic type of chart, and a type that you’ve probably seen before. Because it’s so simple it’s really easy to read, but this also means a lot of nuance is lost.

You can’t see exactly what happened during the day, but you can use it to identify trends and quickly compare closing prices.

While this type of chart isn’t the best for day trading, because you don’t get much intraday data from it, it’s a good starter chart to use to familiarize yourself with the market. 

Bar chart

Bar charts are an easy way to see price fluctuations during the time period you’ve chosen. You’ll see that they increase or decrease in size, sometimes from one bar to the next and sometimes over the full range. 

This is because the bar size is based on price. The height of the bar shows the range between the high and low price during that bar’s period.

This is why bars become larger during periods of volatility, showing how the price fluctuates. When the market is quieter, the bars will be smaller. 

Pay attention to the attached horizontal lines on each bar – the one on the left will be the opening price during that period, and the one on the right will be its closing price.

Candlesticks

This is the chart type you’re most likely to use as a day trader. It looks quite complicated, with lots of colors and shapes, but once you get used to it you’ll find it’s the best way to visualize the data that you need. 

This is very similar to the bar chart, but goes into a lot more detail using color-coded ‘bodies’ to visualize the price range between opening and closing. 

The body will turn white or green if the closing price was higher than the opening, and black or red if opening price was higher than the close.

The high and low prices are referred to as the ‘upper shadow’ or ‘wick’ (to continue the candle metaphor).   

Using candlesticks makes it easy to see how prices are moving during a day of trading, and can also help you to quickly see whether the market is going ‘bull’ or ‘bear’.

So, if bullish sentiment is at a high, you’ll see a cluster of white or green candlesticks. Or, if traders are feeling bearish, you’ll notice a lot more black or red candlesticks.

How to read chart patterns

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Before we start talking about the best chart patterns for day traders, let’s quickly cover how to read charts. 

The three most important things to be able to notice are trendlines, support and resistance. 

  • Uptrend: When the price is moving up over time, with higher highs and higher lows
  • Downtrend: When the price goes down with lower highs and lower lows
  • Support: think of this like the floor. This is the lowest level that the stock hits before it starts going back up again
  • Resistance: the ceiling. This is where stocks tend to stop and start moving back downwards as buyers lose their nerve
  • Breakout: when the price moves above the resistance level or below the support level, in higher volume, it’s considered a break
  • Reversal: when the price changes direction and starts a new trend. So moving up again after a downtrend, or down after an uptrend.

Remember that support and resistance levels tend to be psychological, and past performance doesn’t determine what will happen in the future.

However, having some knowledge of where things turned around in the past can help you to anticipate upcoming changes.

12 of the best day trading chart patterns to track

Now that we’ve covered the basics of day trading, price charts and how to read them, let’s dive in with the most important charts for day traders to track.

1. Bullish flag & Bearish flag

This is one of the most common patterns used by day traders. This type of pattern is known as ‘continuation’ which means it should last for a while – the resulting chart will look like a flag waving from a pole. 

With both the bullish and bearish version of the pattern, the chart can be split into three parts: 

  • Flagpole: the beginning of the uptrend (bull) or downtrend (bear)
  • Consolidation: aka the flag. During this part of the pattern, traders aren’t quite ready to commit. You’ll see a quick fluctuation of prices, almost sitting between two parallel lines. These lines face downwards in a bullish pattern, and upwards in bearish.
  • Breakout: this is where people leave the flag and start swinging upwards or downwards, with the price hitting higher highs (bull) or lower lows (bear) than those reached during the pole phase. 

The bullish flag makes a good entry point for longer positions. Your target profit should be the breakout point of the flagpole.

To find bullish flags in chart patterns, look for an upward swinging flagpole followed by a consolidation that trends slightly downwards. From here, you want to monitor and wait for the breakout point to hit. 

To find bearish flags, you’re looking for downward swinging flagpoles and an upward consolidation. This type of pattern can give you a good idea of when to enter for a short position. It can also indicate your stop loss and likely profit. 

2. Ascending & descending triangle

Just like the bullish and bearish flag patterns, the ascending and descending triangle chart patterns are reflections of each other.

The main indicator to look for is a horizontal trend line (either resistance or support), with the other line moving towards it to create a triangle. 

The ascending triangle is a bullish pattern, moving upwards. This is one of the best chart patterns for day traders to know as it tends to indicate a breakout towards an upward trend. This means a good chance at making big profits.

To draw the trend lines, look for two swing highs and two swing lows on your chart. You’re looking for horizontal resistance, and an upwards moving support. You’ll notice trading volumes starting to fall off close to the point of the triangle, before swinging wildly upwards into a breakout. 

With a descending triangle, you’ll expect to see a falling resistance line and horizontal support line. As support and resistance start to meet, you’ll start to notice a breakdown. This is a good pattern for day traders trying to find the best exit point. 

3. Symmetrical triangle

Don’t let the name fool you – this type of triangle is very rarely symmetrical in the true sense of the world. It takes its name because both the support and resistance lines are moving towards each other, and neither one is holding steady and horizontal. 

To identify this type of pattern, you’re looking for at least two higher lows and two lower highs. The breakout might be upward, or downward – and again, it can be bullish or bearish.

These triangles tend to form after a bullish or bearish trend, and start to reverse. If you notice trading volume increase after a bullish upswing, it’s likely that it will be followed by a breakout. Likewise, with the bearish triangle, it can often indicate a breakdown. 

Of course, none of this is guaranteed. We’ve seen some bearish symmetrical triangles breaking upwards so it’s best to hold strong and wait for some confirmation before making any big decisions. 

4. Cup and handle

This day trading pattern is super distinctive – just look for the u-shape on your chart. Price and volume tend to increase steadily, before falling and rising again to create a cup shape. This is usually followed by another small fall, creating a smaller u-shape that looks like a handle. 

After the handle, there’s usually a breakout with the price soaring. 

As you’ve probably guessed, this chart pattern is bullish. Seeing a cup appear on your chart is a good indicator that an uptrend is on the way. Look out for this one if you’re planning to hold a position a little longer. 

Remember that prices can fall as well as rise, so set your stop-loss wisely. Near the bottom or top of the cup are good places, depending on how tolerant you are to risk.

5. Head and shoulders

This reversal pattern is a good way to identify that a bearish trend is on the way after bullish behavior, so it’s a good one to be able to recognize.

The four main things to look for on the chart are: 

  • Left shoulder: this tends to appear right after a long upward trend, when the price reaches a peak and then drops into a trough
  • Head: the price peaks higher than the shoulder, and then falls down into another trough
  • Right shoulder: this small upward trend doesn’t rise as high as the head, instead creating another shoulder. It will probably peak somewhere around the height of the left shoulder before dropping.
  • Neckline: connect the lowest point of the two shoulders to determine the support level. This is a great place to set your stop loss.

To identify this pattern on your chart, check to see if the price was trending upwards before the left shoulder formed. You also want to check that trading volume increased during the rise of the first shoulder before decreasing during the following drop. 

These changes in trading volume are replicated in the head and right shoulder, too. The pattern is only complete once the neckline is broken by a price movement.

Like many chart patterns, there’s an opposite version – the inverse and shoulders. This happens when a long bear pattern is about to switch over to bull. It’s basically the opposite, with the shoulder forming after a downtrend and the head dropping lower than the shoulders. Basically like an upside down person.

6. Double top

Picture the head and shoulders chart pattern, but without the head. So there’s a neckline here, but instead of three peaks of varying size you’ll only see two peaks at roughly the same height. 

The price will hit the resistance level twice. After failing to breakout for the second time, the price starts to drop. There’s usually a small uplift once the price drops below the neckline, however this usually precedes a much deeper downward breakout. 

It’s a great tool for identifying likely market reversals. The best place to set the stop loss is just above the support level (neckline) as prices can dip drastically once the breakout happens.

7. Double bottom

Like the double top, the double bottom indicates that a new trend is on the way – this time an upwards swing. This usually happens when the asset is at its lowest price, dipping down twice to test the support level. 

This is then followed by an upward bounce. A good time to enter is just as the asset crosses the resistance level, taking your profit and exiting once the price moves fully into the upwards trend. 

Keep your stop loss lower, just under the resistance line.

8. Rising wedge

Another reversal pattern to look out for, the rising wedge is an upward-sloping price chart with two converging trendlines. This usually appears in bear market, and is usually seen alongside decreasing trading volume. 

On your chart, you’ll want to draw two lines – your resistance and support. The upper will connect two pivot highs, while the lower line will connect two pivot lows. It looks similar to the bear flag with the two lines sloping towards each other.

This is one of the most popular chart patterns with experienced day traders because the target is reached quickly after breakdown. You don’t need confirmation to take your trade – wedges tend to break quickly, and drop to target fast. 

They tend to be one of the most consistent chart patterns, but remember that nothing is guaranteed!

9. Falling wedge

The falling wedge is the sister pattern of the rising wedge, and is considered a bullish pattern. This is just as powerful, and tends to indicate a reversal – although sometimes it does appear to continue the current trend, too. 

You’ll usually see the falling wedge as price correction during a bullish trend. As people start to pull back, you’ll see the two trendlines moving downwards. The trend is complete when there’s a breakout, and the price bursts out of the wedge’s resistance.

Again, this pattern is usually accompanied by declining trade volume. This is a key indicator to look for if you want to be sure of exactly what you’re looking at.

An easy way to spot a falling wedge is to look for a slight dip in an otherwise clean uptrend. This is where buyers are starting to lose a bit of nerve, and momentum drops. It’s an indication that the price correction has ended, and that prices are going to go back up again.

10. Engulfing candles

Like all of the other chart patterns we’ve discussed today, engulfing candles can be either bullish or bearish. The key indicator here is a large candlestick that completely overlaps (or engulfs) the candlestick from the previous day.

In a bullish engulfing pattern, you’ll see a small black or red candlestick (indicating the bearish trend) followed the next day by a large white or green candlestick – indicating the return to a bullish trend.

And vice versa: with bearish engulfing pattern, you’ll see the white or green candlestick completely eclipsed by a black or red ‘down’ candlestick.

To figure out whether this is a true indication of a reversal, it’s important to look at the other candles before the two forming the pattern. For example four or more black/red (or white/green) candlesticks before the large engulfing candle.  

You’re looking for two large candles. While two smaller candles can engulf each other, it’s way more significant if you see it happen with two large candles.

And, if the market is volatile, these types of pattern aren’t as important because you’ll probably be seeing them a lot.

Bullish engulfing candles

This pattern tends to be seen during a downtrend.

On the second day – the day with the larger candle – you[‘ll see the opening price lower than the previous low, but with buying pressure pushing price up to a higher high.

This large price gap is what makes the candle so big and wide. With a bullish engulfing candle, it could represent a change of sentiment – meaning prime time to enter a position.

Check to see if trading volume is increasing along with price.

There are two ways to approach this. Some traders will buy towards the end of the day, anticipating that the market will continue trending upwards.

If you’re more risk averse, the best option is waiting for the following day.  This way you have more clarity about whether a true reversal has begun. 

Bearish engulfing candles

When you see this pattern, you’ll know that sellers have overtaken buyers – pushing the price down faster than buyers can push it up. This pattern is most noteworthy if you see it after a price increase – either as part of an uptrend, or a gentle swing upwards as part of a downtrend. It’s best to wait until the second candle closes before taking action, whether that’s selling a long position or entering a new short. One of the best places to put your stop loss here is above the high of the two bar pattern.

11. Hanging man candlestick

Another bearish reversal pattern, the hanging man only uses one candle.

This has a short wick (and sometimes no wick) on top, and a long shadow underneath. Combined with the short body, due to the low variation in opening and closing price, it has the appearance of a hanging man – hence the name. 

Hanging man candlesticks can either be green/white (indicating that the asset closed at a higher price than it opened) or red/black (showing it closed lower than it opened).

The most important thing to look at is the length of the shadow. The longer it is, the more meaningful this pattern is likely to be. 

This chart pattern is most important if it forms during an uptrend. It can be a good indicator that it’s time to exit a position. 

12. Hammer candlestick

Just like the hanging man, the hammer pattern only consists of one candle.

This is a bullish reversal patter and tends to form during a downtrend. They look like a ‘T’ and tend to show an effort to find a market bottom.

They appear when sellers enter the market during a price drop, with buyers pushing the price back up.

To identify a hammer candlestick, look for a lower shadow that’s at least double the height of the candlestick’s body. If you see price trending upwards after the hammer candlestick it’s confirmation that the reversal has taken place. 

This pattern is a good sign that it’s time to enter a long position, placing your stop loss underneath the low of the hammer’s shadow. 

It’s best to use the hammer alongside other price or trend analysis.

Track the best day trading patterns with TradeZella

Using technical analysis tools like chart patterns goes a long way to improving your abilities as a trader. But if you’re not tracking your successes and failures, it’s going to take a lot longer to reach your full potential.

That’s why it’s so important to use a trading journal like TradeZella.

Our innovative trading journaling software makes it easy to track every aspect of your trades – from your strategy down to how you were feeling that day. This makes it easy to identify where you’re going wrong, and what you’re doing right, so you can eliminate problems and replicate your successes. 

While it’s possible to journal using a simple spreadsheet or notepad, our software makes analysis even easier with its in-depth features.

You can replay your trades, build custom plans and download reports that tell you more about your trading style and how to improve it.

Join TradeZella and start reaching your full potential as a day trader.

 
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