Key chart patterns that can enhance your intraday trading strategy

Intraday trading, also known as day trading, is a dynamic strategy in which traders aim to profit from short-term price movements within a single trading day.

Unlike longer-term trading strategies, intraday traders close all positions by the end of the trading day, avoiding overnight exposure to market risks. This approach can be applied to a variety of assets including stocks, gold, oil and more.

Success in intraday trading hinges on speed, discipline and a solid understanding of chart patterns that signal potential price movements. Whether you are new to trading or looking to refine your skills, understanding these patterns can be crucial for making informed decisions.

Understanding intraday trading

Intraday trading is centred on taking advantage of small price fluctuations. The goal is to buy low and sell high (or sell high and buy low in the case of short selling) within the same day. The rapid nature of this trading style requires a keen eye on market developments, technical indicators and chart patterns that can predict price movements.

The tools of the trade include technical analysis, which helps traders interpret charts and identify patterns that suggest the direction of price movements. Intraday traders typically use short time frames on charts, such as one , five or 15-minute intervals to spot opportunities quickly.

The best chart patterns for intraday trading

Chart patterns are visual representations of price movements that can indicate potential market trends. Recognising these patterns can give intraday traders an edge in predicting the market's next move.

Here are some of the most effective chart patterns for intraday trading:

The head and shoulders

The head and shoulders pattern is one of the most reliable reversal patterns in trading. It consists of three peaks: a higher peak (the head) flanked by two lower peaks (the shoulders). This pattern often signals the end of an uptrend and the beginning of a downtrend.

• Formation: The pattern forms when the price rises to a peak and then declines, rises again to a higher peak and falls once more, followed by a third peak that is lower than the second but higher than the first.
  
  
• Trading strategy: When the price breaks below the neckline (a horizontal line drawn through the lowest points of the two troughs), it signals a potential sell opportunity.

Double tops and double bottoms

Double tops and double bottoms are reversal patterns that indicate a change in the direction of the prevailing trend. The double top appears at the end of an uptrend, while the double bottom forms at the end of a downtrend.

• Double top: This pattern occurs when the price reaches a peak, retreats and then rises to the same level before declining again. It suggests a bearish reversal.
  
  
• Double bottom: This pattern occurs when the price drops to a certain level, rebounds, and then drops to the same level again before rising. It indicates a bullish reversal.
  
  
• Trading strategy: For a double top, traders often look to short the asset when the price breaks below the support level formed between the two peaks. For a double bottom, the break above the resistance level formed between the two troughs signals a buying opportunity.

Flags and pennants

Flags and pennants are continuation patterns that indicate a brief consolidation before the existing trend resumes. These patterns are characterised by short-term pauses in price movements.

• Flag pattern: This pattern forms when the price moves sharply in one direction, then consolidates within parallel lines that slope in the opposite direction of the trend (forming a flag shape). It suggests that the trend is likely to continue in the same direction.
  
  
• Pennant pattern: The pennant is similar to the flag, but the consolidation phase forms a small symmetrical triangle (pennant).
  
  
• Trading strategy: Traders typically enter a trade in the direction of the breakout once the price breaks out of the flag or pennant pattern. The expectation is that the price will continue moving in the direction of the preceding trend.

Triangles

Triangles are versatile patterns that can indicate both continuation and reversal signals. The three main types of triangles are ascending, descending and symmetrical.

• Ascending triangle: This bullish pattern forms when the price makes higher lows while encountering resistance at a consistent level. It suggests that buyers are gaining strength and a breakout above the resistance level could trigger a strong upward move.
  
  
• Descending triangle: This bearish pattern is the opposite of the ascending triangle. It forms when the price makes lower highs while finding support at a consistent level. A break below the support line could indicate a downward move.
  
  
• Symmetrical triangle: This pattern forms when the price converges into a tighter range, making lower highs and higher lows. The breakout can occur in either direction and traders often wait for the breakout to determine the trade's direction.
  
  
• Trading strategy: Traders typically enter the trade when the price breaks out of the triangle pattern, placing stop-loss orders just outside the opposite side of the pattern to manage risk.

The cup and handle

The cup and handle is a bullish continuation pattern that resembles a tea cup. It signals a potential upward breakout after a period of consolidation.

• Formation: The pattern forms when the price declines, then gradually rounds out to create a U-shape (the cup), followed by a smaller dip (the handle) before breaking out upward.
  
  
• Trading strategy: Traders typically buy when the price breaks above the handle’s resistance level, anticipating a continuation of the upward trend.

Using a trading demo account

For those new to intraday trading or looking to test new strategies without risking real money, using a trading demo account on an online trading platform such as Exness is highly recommended.

A demo account allows you to practise trading in real market conditions with virtual funds. It’s an excellent way to familiarise yourself with chart patterns, test your strategies and build confidence before committing real capital.

This article was sponsored by Exness.

_{Exness ZA (Pty) Ltd is authorised by the Financial Sector Conduct Authority in SA as a financial service provider (FSP number: 51024). Exness' services relate to complex derivative products which are traded outside an exchange. These products come with a high risk of losing money rapidly due to leverage and thus are not appropriate for all investors.}