Day trading or Intraday trading is mainly based on technical analysis. Since buying and selling are done on the same day, there is no room to hold positions in day trading. Therefore, fundamental analysis is not of much help to day traders. An intraday trader aims to learn about essential intraday chart patterns.
The stock market opens at 9:15 AM and closes at 3:30 PM. During this session, only certain timeframes are best suited for day trading. A day trader requires a suitable framework to operate in such a short period of time. And this is where technical analysis comes into play.
Technical analysis is the study of charts that graphically depict price movements. As price action occurs, certain patterns form on these charts. Day traders use these patterns to place bets.
Check out some of the most frequently formed intraday chart patterns that can help create an effective trading setup.
What is a chart?
A stock market chart represents how price has moved in the past and how it has moved now. Based on this, traders try to predict how the price will move. There are different chart types like Candlestick, Renko, Line, Bar, Heikin Ashi, etc. Different traders use different chart types to trade, but the most commonly used chart is the candlestick chart.
Many Intraday chart patterns are formed on candlestick charts based on how the price has moved in recent times. These intraday chart patterns represent price behaviour that tells you a story. We’ll see what each sample type represents.
Types of Intraday Chart Patterns
Here are some types of Intraday chart patterns traders use effectively in their trade setup.
- Head and shoulder model
- Cup and handle model
- Wedge Model
- Flag pattern
- Double bottom pattern
- Double Top pattern
- Triangle pattern
Let’s look at each sample individually and learn how to use them to upgrade your trading game.
1. Head and shoulder model
A typical head and shoulders pattern has a small left shoulder, a head-like structure in the center, and a right shoulder similar to the left shoulder. The baseline of the head and shoulders pattern is often referred to as the neckline. This bearish pattern involves sellers actively trying to sell while buyers’ attempts to raise prices fail. Once the neckline is broken, the price can drop significantly lower.
A head and shoulders pattern is shown in the image shown below.
Day traders are making the most of this momentum. The opposite of the head and shoulders pattern is the inverse head and shoulders pattern.
This is the opposite of the head and shoulders pattern (shown above). An inverted head and shoulders pattern implies that the stock price is ready to break out and move up after the divergence is eliminated.
2. Cup and Handle Model
The cup and handle pattern implies that sellers lowered their prices, but buyers absorbed all the selling and brought the price back to the level where it started to fall. Another way to look at this is that the seller’s attempt to lower the price failed because the buyer entered at a lower level. The price reversal to a higher high after the turnaround looks like a cup.
After reaching the old level, the price stops for a while and forms a pattern like the handle of a cup. As the price rises from this level, a significant upward movement can be seen, which can be day-traded.
The image below illustrates the cup and handle design.
3. Wedge Pattern
The wedge pattern is often referred to as a microtrend. There are two types of wedges, one is a rising wedge and the other a falling wedge. A rising wedge is a micro-uptrend that occurs within a large downtrend. When the trendline of this wedge is broken, the price could return to the main downtrend. This can allow day traders to follow the main trend.
On the other hand, a falling wedge is a micro-downtrend that forms when the primary trend is bullish. It acts as a merge phase when the price runs out.
4. Flag pattern
The flag pattern consists of a column candlestick structure and a small price consolidation that appears as a flag on the top of the column. This pattern again represents the consolidation phase after a strong unilateral move. Although, this merger is a very small stage. When the price breaks through the top of the flag, it can form another flag.
The image below illustrates how flag patterns are formed and how you can set a target based on the size of the flagpole. Intraday chart patterns
Usually, when the price goes up, it creates bullish flag patterns; when the price goes down, some bearish flag patterns form on the chart. As a day trader, you can make the most of these moves if you know the patterns.
5. Double bottom pattern
The double bottom is a bullish chart pattern. In this pattern, the price makes two equal or nearly equal bottoms before the start of an uptrend. The level at which the price starts to rise again becomes the support or demand zone.
Indeed, the price has supported this level even though sellers have tried to lower the price twice. As an intraday trader, you can look for buying opportunities in such a demand zone.
The image above illustrates an example of a bullish double bottom on an actual stock market chart.
6. Double Top Pattern
This is the opposite of a double bottom. The double top is a bearish pattern. It implies that the buyers tried to double the price, but the sellers were actively selling at that level.
Such a level can be called a resistance or supply zone because the price resists above this level, and sellers initiate supply action when the price reaches this zone. As a trader, you can use these levels to sell stocks as the price could fall.
The image above illustrates how a double top formed, and the price moved lower after being rejected from the resistance area.
7. Triangle Pattern
Three types of triangle patterns form on the chart. They are:
- Symmetrical triangle,
- Ascending triangle
- Descending triangle.
Let’s check them out one by one.
Symmetrical triangle pattern
In this pattern, there are lower highs and higher lows. This means that as each candle forms, the price will drop to a smaller range, as shown in the image.
In such cases, the price can move in any direction. Usually, this type of pattern will form when there is a tug-of-war between buyers and sellers. You should wait for the breakout on either side before taking a trade when such a pattern forms.
Ascending triangle pattern
The ascending triangle pattern is bullish. In this case, all the swing highs will be at the same level, and each low will be higher than the previous low. With each candle, the price rises but remains below the resistance area.
This implies that buyers are increasing and the impact of sellers is decreasing. Once the swing high is removed, the price can increase significantly. You can refer to the image provided above for better understanding.
Descending triangle pattern
This pattern is the opposite of the ascending triangle pattern. In this case, the lows fluctuate at or near the same level, while there are consistently lower highs. It forms when sellers strengthen, and buyers weaken. You can use the lower price when the swing low is broken.
Please refer to the above illustration to better understand the descending triangle pattern.
Intraday chart patterns can be useful for traders looking to profit from short-term price movements. However, it is important to remember that these models are unreliable.
Using intraday chart patterns in conjunction with other technical analysis tools and your own trading experience is always best.