The most profitable chart patterns are not those that are complicated and sound like they belong in another dimension; in fact, the deeper we look for complex patterns, the lower the probability of profit and net gain over time becomes; additionally, we frequently miss the point of Kiss – Keep it simple, stupid! – in trading.
Table of Contents
- Most Profitable Chart Patterns
- 1. Bullish Pennant Pattern
- 2. Bullish Flag Pattern
- 3. Bearish Pennant Pattern
- 4. Bearish Flag Pattern
- 5. Double Top Pattern
- 6. Double Bottom Pattern
- Frequently Asked Questions
- Most profitable chart patterns pdf
Do you know that the majority of chart patterns have a win rate of less than 40%? – A major source of concern that many traders overlook, especially if you are new to trading.
If you are looking for long-term profitable chart patterns that are simple and easy to trade, you have come to the right place because in this blog, we will look at the Top 6 most profitable chart patterns.
Our technical research team selected the best six most successful chart patterns based on rigorous back testing and research. After gathering twelve months of back tested data, we concluded the most effective chart patterns for trading.
Technical analysis and market research – Back Testing Chart Patterns : Most Profitable Chart Patterns report has been updated on a regular basis and we have back tested the twelve most common and popular chart patterns.
Most Profitable Chart Patterns
Following the statistical reliability of these twelve chart patterns, we successfully back tested the top six performing chart patterns for a period of twelve months on a selected group of instruments including stocks, currency pairs, and commodities.
Back tested results show that the following chart patterns are the most profitable chart patterns:
1. Bullish Pennant Pattern
- Bullish pennants are one of the most profitable chart patterns that form during an uptrend and provide confirmation of bullish continuation.
- The bullish pennant chart pattern has proven to be the best chart pattern in terms of returns, with a net gain of 50.25% over a twelve-month period during back testing.
- In terms of probability of profit, or net win rate, the bullish pennant has a 58.33% win rate over a year.
- Another advantage of the bullish pennant is that it has a low drawdown. This is due to the fact that the stop loss in the case of the bullish pennant is very close to the price, making the bullish pennant pattern the best risk averse pattern.
- A bullish pattern is formed by two converging lines. The time difference between pennant and triangle patterns is significant: triangle patterns typically have a long duration.
- Pennants represent a pause before prices move higher; if this phenomenon is not observed, there is a greater likelihood of a reversal.
An analysis of various stock indices and currency pairs over the past decade indicates that trading the Pennant pattern can result in a success rate of approximately 70%. While the pattern itself can be relatively common, combining it with other technical indicators can significantly improve its reliability.
When trading the Pennant pattern, confirm the trend direction, set entry orders just above the upper trendline for a bullish breakout or just below the lower trendline for a bearish breakout, and implement stop-loss orders to manage risk. Wait for breakout confirmation with increased volume and measure the potential price target by adding the height of the Pennant’s flagpole to the breakout point. This approach can help you make informed trading decisions while minimizing risk.
2. Bullish Flag Pattern
- Bullish flag is one of the most common and one of the most profitable chart patterns, as well as one of the most effective and successful chart patterns. Bullish flag is also a continuation pattern, which frequently results in an uptrend continuation once the flag breakout is successful.
- According to back tested data, the bullish flag pattern performs well in terms of net overall gain percentage, with a net return of 41.176% calculated over a one-year period.
- Bullish flag pattern breakouts are fairly consistent, with a success rate of 58.34%.
- The stop loss in bullish flag patterns is usually located below the lower line, allowing for good risk-reward trades, which explains why the data suggests only 3.21% overall drawdown.
- Bullish flag pattern is formed by two parallel lines and frequently results from close price congestion and that too in a short period of usually 1 to 2 weeks.
- If the breakout from the flag formation occurs in the opposite direction of the major trend, it frequently results in a reliable trend reversal signal and should be traded accordingly.
A study of S&P 500 historical data over the past decade reveals that trades based on flag patterns have resulted in an average return of 12.5% per trade, significantly outperforming the market.
When trading flag patterns, consider placing your stop-loss just below the lowest point of the flag for bullish flags and above the highest point for bearish flags.
3. Bearish Pennant Pattern
- When a bearish pennant chart pattern forms during a downtrend, it indicates a temporary pause in short selling.
- When prices break out of a bearish pennant, they frequently continue to fall, signaling bearish continuation.
- According to the back test research report, the bearish pennant is one of the most reliable chart patterns, with an average return of nearly 34.14% over a twelve-month period.
- Pennant formations, whether bullish or bearish, have a good risk-reward ratio because of a very reasonable stop loss level that is just near one of the trend lines (upper one in the case of a bearish pennant), which is why a bearish pennant has a profit probability of 50%.
- Bearish pennant formation is of short duration, typically lasting 1 to 3 weeks, as opposed to triangle patterns, which typically last much longer.
- The formation of a bearish pattern is similar to that of a bullish pennant in which two trend lines converge.
- The average maximum drawdown for a bearish pennant is 2.43%, which is very low when compared to other patterns.
4. Bearish Flag Pattern
- A bearish flag pattern is a continuation pattern, which means that the downtrend is likely to continue and that this pattern is simply a pause in the downtrend.
- Bearish flag formation is fairly simple; it consists of two parallel lines not far apart that also show tight price movement congestion.
- The back test report has proven that the bearish flag is a fairly profitable pattern, with a win rate of 50% over a one-year period.
- In the case of a bearish flag pattern, the stop loss is not far from the price, which is why we have a maximum drawdown average of only 2.45%.
- Over a year, the net returns from back testing for bearish flag have been 32.44%.
- Breakout from a bearish flag in the opposite direction of the major trend often indicates a trend reversal.
5. Double Top Pattern
- The formation of a double top pattern includes two major swing highs and a neckline; it frequently appears at the end of an uptrend, signaling a trend reversal.
- The double top pattern is a long-term trend reversal pattern that takes at least 5 to 6 weeks to form (for daily candles).
- Back testing has revealed that the double top pattern is a profitable chart pattern with a net gain of 21.35%.
- The win rate of the double top pattern is reasonable at 50%.
- It is critical to wait for the double top pattern to fully form before entering any trades, as these patterns frequently take time to provide signals.
- The fact that the stop loss is placed far from the entry and can be challenging to determine, particularly in volatile instruments, is a significant drawback of the double top pattern. This factor is also emphasized in back tested results, which show a max drawdown of 5.349%, which is significantly higher than other patterns.
- To improve accuracy and reduce drawdowns, trade the double top pattern in conjunction with other indicators such as RSI or volume.
6. Double Bottom Pattern
- The double bottom chart pattern is the inverse of the double top chart pattern in that it has two swing lows that indicate a downtrend reversal.
- The net profitability of the double bottom pattern is not very significant, but it is positive, i.e., 15.97%, and thus, according to the back testing data, the double bottom pattern secured the last position in the most profitable chart patterns.
- Although the pattern appears to have a 50% win rate, double bottom patterns are uncommon and frequently misunderstood by traders.
- Stop loss manipulation is common with double bottom patterns, so keep this in mind when putting a stop loss.
- The maximum drawdown average for the double bottom pattern is 6.45%, which appears to be on the higher side when compared to the double top and other chart patterns.
- To take advantage of trading opportunities for trend reversal with better risk management and win rate, trade the double bottom pattern with the help of supporting indicators such as RSI and volume.
A study of cryptocurrency data from the last five years demonstrates that trades based on Double Top and Double Bottom patterns have a success rate of approximately 75%.
Combine these patterns with volume analysis to increase your chances of success. Look for a decline in trading volume during the pattern formation.
Finally, if you have discovered the details of the most profitable chart patterns, you should apply these top 6 chart patterns and back test them in different time frames; this will help you develop great pattern recognition and analytical skills for trading chart patterns.
Effective technical analysis is incomplete without the application of these chart patterns for trading; thus, you should incorporate them into your daily trading routine to achieve the greatest trading outcomes.
Most successful chart patterns in technical analysis of stock chart patterns gives trader advantage of getting in trades at right time and getting out before trend direction changes and profits left on table.
Check :- Chart Patterns & Intraday trading
Note: Always conduct thorough research and consider seeking advice from financial professionals before making any investment decisions. This article is for educational purposes only and should not be construed as financial advice.
Frequently Asked Questions
What are the most reliable chart patterns?
Flags and pennants are two of the most consistent chart patterns.
What are the most profitable chart patterns in finance?
Most profitable chart patterns in financial markets are flags, pennants, double top, double bottom.
What are the most common chart patterns?
Flag , pennant , rectangles, wedges are the most common chart patterns
Is trading chart patterns profitable?
In the long run, trading statistically reliable chart patterns with proper risk management appears to be highly profitable.
What are the best chart patterns for day trading?
Find complete details in this article – best chart patterns for day trading
Most profitable chart patterns pdf
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Infographic for the most profitable chart patterns for trading
See Also :- Which Chart Patterns are successful in Forex Trading?