Chart Patterns: The Blueprints of Price Movement

Chart patterns are geometric shapes formed by price movements that have a tendency to resolve in predictable ways. They are divided into two categories: Reversal Patterns and Continuation Patterns.

Reversal Patterns

Head and Shoulders

The most reliable reversal pattern.

Structure:

1. Left Shoulder: A peak, followed by a decline.
2. Head: A higher peak, followed by a decline to the same level.
3. Right Shoulder: A lower peak, roughly equal to the left shoulder.
4. Neckline: The support level connecting the two troughs.

Trade: Sell when price breaks below the neckline. Target = distance from head to neckline.

Inverse Head and Shoulders: Same structure flipped upside down at the end of a downtrend. Buy when price breaks above the neckline.

Double Top / Double Bottom

• Double Top (M-shape): Price hits resistance twice, fails, and reverses down. Sell on break below the middle trough.
• Double Bottom (W-shape): Price hits support twice, holds, and reverses up. Buy on break above the middle peak.

Triple Top / Triple Bottom

Same concept as double, but with three tests. More reliable because the level has been tested more times.

Continuation Patterns

Triangles

Ascending Triangle:

• Flat resistance + rising support.
• Bullish bias — usually breaks up.

Descending Triangle:

• Flat support + falling resistance.
• Bearish bias — usually breaks down.

Symmetrical Triangle:

• Converging trendlines with no directional bias.
• Can break either way — trade the breakout direction.

Flags and Pennants

Short consolidation patterns within a strong trend.

• Bull Flag: Strong move up → slight pullback in a channel → breakout continues up.
• Bear Flag: Strong move down → slight pullback up in a channel → breakout continues down.
• Pennant: Similar to a flag but the consolidation forms a small triangle.

Rectangle (Box)

• Price consolidates between horizontal support and resistance.
• Eventually breaks in the direction of the prior trend.

How to Trade Chart Patterns

1. Identify the Pattern

Draw trendlines connecting the highs and lows. Make sure the pattern is clear.

2. Wait for the Breakout

Don't trade inside the pattern. Wait for a clear break of the key level (neckline, trendline, etc.).

3. Confirm with Volume

A valid breakout should show increased volume. Low-volume breakouts are often false.

4. Measure the Target

Most patterns have a measured move target:

• Head and Shoulders: Height from head to neckline, projected from the breakout.
• Triangles: Width of the triangle at its widest point, projected from the breakout.
• Flags: Length of the initial move (flagpole), projected from the breakout.

5. Set Your Stop Loss

• Place stop above/below the pattern boundary.
• For Head & Shoulders: Stop above the right shoulder.
• For triangles: Stop on the other side of the pattern.

Chart patterns are not guarantees, but when combined with other analysis, they significantly improve your odds.