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Chart Patterns

Difficulty beginner

Overview

Chart patterns are recognizable formations in price data that suggest future price direction. They emerge from collective market psychology and self-fulfilling behavior.

Reversal Patterns

Head and Shoulders

Structure: - Left shoulder: Price rises, then falls - Head: Price rises higher, then falls - Right shoulder: Price rises (lower than head), then falls - Neckline: Support line connecting the lows

price                                                              
  │                              ● head                            
  │                            ╱  ╲                                
  │                          ╱      ╲                              
  │                        ╱          ╲                            
  │             ●  left  ╱              ╲    ● right shoulder      
  │           ╱   ╲    ╱                  ╲ ╱ ╲                    
  │         ╱       ●╱                     ●    ╲                  
  │       ╱                                       ╲                
  │ ┄┄┄┄●┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄●┄┄┄ neckline    
  │                                                  ╲             
  │                                                    ╲   ↓ break 
  │                                                      ╲         
  │                                            target ●  ╲         
  └──────────────────────────────────────────────────────────→ time
         entry: short on neckline break                            
         stop : above right shoulder                               
         target: head-to-neckline distance, projected down

Entry: Short when price breaks below neckline Stop Loss: Above right shoulder Target: Distance from head to neckline, projected downward

Inverse Head and Shoulders

Bullish version of H&S (upside down).

Double Top

Structure: Price tests a resistance level twice and fails both times.

price                                                                
  │ ┄┄┄┄┄┄┄┄●┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄●┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄  resistance (tops)    
  │       ╱   ╲           ╱   ╲                                      
  │     ╱       ╲       ╱       ╲                                    
  │   ╱           ╲   ╱           ╲                                  
  │ ╱               ●               ╲   ↓ break of neckline         
  │                                   ╲                              
  │ ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄●┄┄┄  neckline (support)      
  │                                     ╲                            
  │                          target  ●   ╲                           
  └──────────────────────────────────────────────────────→ time

Entry: Short on neckline break Stop: Above tops Target: Distance from top to neckline, projected down

Double Bottom

Bearish version of double top (upside down). Bullish reversal.

Triple Top/Bottom

Three tests of resistance/support. Stronger signal than double top/bottom.

Continuation Patterns

Triangles

Symmetrical Triangle

     /\
    /  \  Converging trendlines
   /    \  Neither bulls nor bears dominate
  /      \
 /        \
Breakout direction determines bias

Entry: On breakout with volume confirmation Stop: Opposite side of triangle Target: Height of triangle at widest point

Ascending Triangle

  ──────────── Resistance (flat)
     /\      /\
    /  \    /  \
   /    \  /    \
  /      \/      \
 /  Rising support
Bullish bias. Entry on resistance break.

Descending Triangle

  \    /\    /\
   \  /  \  /  \
    \/    \/    \
     ──────────── Support (flat)
Bearish bias. Entry on support break.

Flags and Pennants

Bull Flag

    │  Pole (sharp rise)
    │
    ╱╲
   ╱  ╲  Flag (downward channel)
  ╱    ╲
 ╱──────╲
│  Breakout up

Entry: On breakout above flag Stop: Below flag low Target: Length of pole added to breakout point

Bear Flag

Inverse of bull flag. Bearish continuation.

Pennant

Small symmetrical triangle after sharp move. Similar to flags but converging.

Cup and Handle

    U         U    Handle
   / \       / \
  /   \     /   \───
 /     \___/
Cup

Entry: Break above handle resistance Stop: Below handle low Target: Depth of cup added to breakout

Entry, Exit, and Risk for All Patterns

Universal Framework

Pattern Entry Stop Loss Target
H&S (bearish) Neckline break Above right shoulder Head-neckline distance
Double Top Support break Above tops Top-support distance
Triangle Breakout Opposite side Triangle height
Flag Breakout Flag extreme Pole length
Cup & Handle Handle break Handle low Cup depth

Volume Confirmation

  • Breakout should occur on above-average volume (1.5x+ normal)
  • Volume should decline during pattern formation
  • Low volume breakouts are suspect (higher failure rate)

Pattern Reliability

Pattern Reliability Best Timeframe
H&S High Daily, Weekly
Double Top/Bottom High Daily, Weekly
Triangles Medium All timeframes
Flags/Pennants High Intraday, Daily
Cup & Handle Medium Daily, Weekly
Wedges Medium All timeframes

Failure Modes

Failure Type Signs Action
False breakout Low volume, quick reversal Exit immediately
Pattern doesn't complete Price drifts away No trade
Target not reached Weak follow-through Trail stop, exit early
Pattern takes too long Stales out Cancel trade idea

Practical Guidelines

  1. Wait for Confirmation — Don't anticipate; wait for the breakout
  2. Volume Matters — No volume = no conviction
  3. Context is Key — Patterns in trend direction are more reliable
  4. Measure Targets — Use pattern dimensions for objective targets
  5. Manage Risk — Always define stop loss before entry
  6. Multiple Timeframes — Check higher timeframe for context

Next Steps