Identify Futures Trading Chart Patterns

What Are Chart Patterns In Futures Trading?

Chart patterns are unique bar formations in a price chart that identify a potential trading opportunity in a futures market. There are dozens of recognizable chart patterns that futures traders can employ to help signal trend reversals or price breakouts.

Chart patterns can be as simple as a two-bar “inside bar” or “outside bar“ pattern or as complex as multi-bar “head and shoulders” or “cup and handle” patterns. Having an understanding of which basic charts patterns to look for will help you expand your analysis skills.


Eight Starting Chart Patterns for Futures Traders

Please be aware that not every futures trading chart pattern will fit exactly into the textbook description of that pattern. Traders need to use their own judgment and understand that variation is possible.

Inside and Outside Bars

An inside bar and an outside bar are two simple futures trading patterns that traders use to identify a possible short-term change in direction, along with potential breakout points. Typically, inside and outside bar patterns are identified using daily or weekly OHLC or candlestick bars.

  • An inside bar occurs when the high and low of the current bar are completely engulfed by the high and low range, represented by the wicks, of the previous bar.
  • An outside bar occurs when the high and low of the current bar are completely engulfing the high and low rang, represented by the wicks, of the previous bar.

Generally, the high and low of the engulfing bar will act as breakout levels for both patterns. Traders will often use these patterns in conjunction with other chart patterns and technical indicators to help identify trading setups and triggers.  

Key Reversals

A key reversal is a simple two-bar pattern that can help detect a short-term change in the market price trend direction. The pattern forms after an observable downtrend or uptrend. Key reversals are frequently used on daily price charts to help identify short-term swing trading opportunities that last a few days.

Key reversal up pattern: starts in a downtrend, then the key reversal bar (current bar) makes a significant low that is lower than the previous few bars, and then that same low bar closes higher than the close of the previous bar. This can often create an outside engulfing bar.  

Key reversal down pattern: starts in an uptrend, then the key reversal bar (current bar) makes a significant high that is higher than the previous few bars, and then that same high bar closes lower than the close of the previous bar.  

Generally, the strongest key reversal patterns occur at the top of an uptrend or at the bottom of a downtrend, increasing the probability and potential for prices to follow through in the direction of the pattern. 

Opening Gaps

While the nearly 24-hour trading available in the futures markets has reduced the number of daily opening gap opportunities, there are still gaps to be found over the weekend and within certain commodity markets with more limited trading hours.

Gaps can easily be seen on a chart where the opening price jumps significantly up or down from the previous closing session. This generally occurs when there is an order imbalance at the open of the session, often caused by news, high volume, or high volatility after the close of the previous session.  

There are two common ways traders look for opportunities in opening gaps:

  1. The exhaustion gap: where the price gap expends most or all of the built up buying or selling pressure, and then market price action reverses back to the previous bar. This is called "filling the gap".
  2. Continuation or breakaway gap: when market prices continue in the same direction as the opening gap. When a market has consolidated for one or more days, and there is a buildup of buying or selling pressure at a certain price level, that pressure can create a breakaway gap.  

Double Tops and Double Bottoms

Double tops and double bottoms are considered reversal patterns that can help identify turning points or changes in momentum. A double top is a bearish reversal pattern that forms after an uptrend, where the price reaches a high, declines, and then reaches a similar high before declining again. A double bottom is a bullish reversal pattern that forms after a downtrend, where the price reaches a low, rises, and then reaches a similar low before rising again.

Traders watch for breakouts or breakdowns from these patterns, which can confirm a change in market sentiment and a potential opportunity to enter a position. By observing the distance between the peaks along with the magnitude of the price movement, traders can better set price targets for their trades.

 

V Tops and V Bottoms

At first glance, these futures chart patterns may appear easy to spot as they are characterized by a sudden, sharp V-shaped formation at the top or bottom of an extended trend. These typically signal the start of a trend reversal, making them a popular pattern for traders. However, remember that the pattern is not identified until a few bars after the V high or V low which could represent a significant missed price move.

A V top, also known as a swing high, is a sharp peak formation on a price chart that occurs when the price reaches a significant high and then quickly reverses to the downside. A V bottom, or swing low, is a sharp trough formation that occurs when the price reaches a significant low and then quickly reverses to the upside. Generally, traders look for at least three bars prior to the high or low of the V pattern and then three proceeding reversal bars to confirm the pattern.

 

Broadening Tops and Bottoms

A broadening top or bottom, commonly known as a megaphone pattern, is a chart formation characterized by increasing volatility with increasingly higher highs and lower lows, forming a shape that resembles a megaphone. This pattern typically indicates market indecision or conflict between buyers and sellers, often occurring at market trend tops or bottoms. 

Traders might use this pattern to anticipate potential reversals as the projection forward of these lines often act as support and resistance levels. However, a breakout above the upper boundary may signal a bullish trend continuation, while a breakdown below the lower boundary could indicate a new bearish trend.

 

Triangles (Ascending and Descending)

A triangle pattern is a chart formation that occurs when the price moves in an increasingly narrow range, with lower highs and higher lows, forming a triangle shape on the price chart. The triangle is the opposite of a broadening megaphone pattern. It is identified by typically drawing two converging trendlines. There are three main types of triangle patterns:

  1. A symmetrical triangle is formed by two converging trendlines with similar slopes. It indicates a period of consolidation before the price breaks up or breaks down. 
  2. An ascending triangle is formed by a flat upper trendline and an ascending lower trendline. It is generally considered a bullish formation, with the expectation that the price will eventually breakout to the upside. 
  3. A descending triangle is formed by a descending upper trendline and a flat lower trendline. It is generally considered a bearish formation, with the expectation that the price will eventually breakout to the downside.

  

Flags

A flag is a continuation pattern that forms after a strong price trend, known as the flagpole. The flag part of the pattern resembles a small rectangle or parallelogram, where price consolidates in a tight range, usually sloping slightly against the prevailing trend. This period of consolidation represents a pause before the market continues in the same direction as the initial move. 

Traders use flag patterns to identify potential breakout points, entering trades when the price breaks out of the flag formation in the direction of the original trend, often with a price target commonly set by projecting the height of the flagpole from the breakout point.

  

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