Intermediate 📖 35 min read 📚 Chapter 7 of 8

Chart Patterns

The visual language of market psychology. Learn to identify reversal and continuation patterns that have predicted price movements for over a century.

Intermediate Course
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Jump to: Reversal Patterns Continuation Patterns Trading Rules Target Calculation

Introduction to Chart Patterns

Chart patterns are formations created by price movements that signal potential future direction. They work because they reflect collective human psychology - patterns of fear, greed, and indecision that repeat across markets and time.

🔄 Reversal Patterns

Signal the end of a trend and beginning of a new one

  • Head & Shoulders
  • Double Top/Bottom
  • Triple Top/Bottom

➡️ Continuation Patterns

Signal a pause in the trend before it continues

  • Triangles
  • Flags & Pennants
  • Wedges
  • Rectangles

Reversal Patterns

Head and Shoulders

👤 Head & Shoulders (Top)

Bearish Reversal Reliability: ⭐⭐⭐⭐⭐
Left Shoulder: Price rallies to a high, then pulls back
Head: Price rallies to a HIGHER high, then pulls back
Right Shoulder: Price rallies again but fails to reach head height
Neckline: Support connecting the pullback lows
How to Trade:
Entry: Break below the neckline (or retest of broken neckline)
Stop Loss: Above the right shoulder
Target: Distance from head to neckline, projected down from break
💡 Pro Tips:
  • Volume typically decreases from left shoulder → head → right shoulder
  • Volume should increase on the neckline break
  • Sloping necklines work too (often make cleaner patterns)
  • Wait for neckline retest for better risk:reward

🙃 Inverse Head & Shoulders (Bottom)

Bullish Reversal Reliability: ⭐⭐⭐⭐⭐

Exact opposite of Head & Shoulders Top. Forms at the end of downtrends.

  • Left shoulder (low), Head (lower low), Right shoulder (higher low)
  • Neckline acts as resistance
  • Break above neckline = buy signal

Double Tops & Bottoms

🔝🔝 Double Top

Bearish Reversal

Price hits resistance twice at similar levels, failing to break through.

  • First peak hits resistance
  • Pullback to support (neckline)
  • Second peak fails at same level
  • Break below neckline confirms

Entry: Below neckline break

Stop: Above the double top

Target: Height of pattern projected down

Reliability: ⭐⭐⭐⭐ High

🔽🔽 Double Bottom

Bullish Reversal

Price hits support twice at similar levels, failing to break through.

  • First low hits support
  • Rally to resistance (neckline)
  • Second low holds at same level
  • Break above neckline confirms

Entry: Above neckline break

Stop: Below the double bottom

Target: Height of pattern projected up

Reliability: ⭐⭐⭐⭐ High

💡 The "W" and "M" Shapes

Double bottoms look like a "W" on the chart. Double tops look like an "M". This is why some traders call them W-bottoms and M-tops.

Triple Tops & Bottoms

🔝🔝🔝 Triple Top / 🔽🔽🔽 Triple Bottom

Reliability: ⭐⭐⭐⭐⭐

Same concept as double top/bottom but with THREE touches of the level.

  • Less common than doubles (more time to form)
  • More reliable when they do form
  • The third failure is often the most aggressive
  • Trade the same way as doubles

Continuation Patterns

Triangle Patterns

📐 Ascending Triangle

Usually Bullish

Flat resistance + rising trend line (higher lows)

  • Buyers getting more aggressive (higher lows)
  • Sellers defending at same level
  • Usually breaks UP through resistance

Entry: Break above flat resistance

Stop: Below the rising trend line

Target: Height of triangle base projected up

📐 Descending Triangle

Usually Bearish

Flat support + falling trend line (lower highs)

  • Sellers getting more aggressive (lower highs)
  • Buyers defending at same level
  • Usually breaks DOWN through support

Entry: Break below flat support

Stop: Above the falling trend line

Target: Height of triangle base projected down

📐 Symmetrical Triangle

Direction Uncertain

Converging trend lines - lower highs AND higher lows

  • Price compressing, volatility decreasing
  • Can break either direction
  • Usually continues the prior trend
  • Wait for breakout to determine direction

Entry: Break of either trend line

Stop: Opposite side of triangle

Target: Width of triangle base

Flags and Pennants

🚩 Bull Flag

Bullish Continuation

Strong rally (flagpole) → small parallel channel pullback (flag)

  • The "flag" slopes against the trend (downward)
  • Low volume during the flag
  • Volume increases on breakout

Entry: Break above flag resistance

Target: Height of flagpole projected from breakout

🏳️ Bear Flag

Bearish Continuation

Strong decline (flagpole) → small parallel channel rally (flag)

  • The "flag" slopes against the trend (upward)
  • Weak rally attempt, low conviction
  • Continuation of the downtrend expected

Entry: Break below flag support

Target: Height of flagpole projected from breakout

🎪 Pennant

Continuation

Like a flag, but the consolidation is a small symmetrical triangle

  • Forms after a strong move (the pole)
  • Short-term consolidation (usually 1-3 weeks)
  • Breaks in the direction of the prior move

Wedges

📈 Rising Wedge

Usually Bearish

Both trend lines slope UP but converge (narrowing range)

  • Looks bullish but is actually bearish
  • Buyers losing momentum despite higher prices
  • Usually breaks DOWN through support
⚠️ Counterintuitive

Rising wedge = bearish. Don't let the upward slope fool you. The weakening momentum tells the real story.

📉 Falling Wedge

Usually Bullish

Both trend lines slope DOWN but converge (narrowing range)

  • Looks bearish but is actually bullish
  • Sellers losing momentum despite lower prices
  • Usually breaks UP through resistance

Pattern Trading Rules

🏆 The Most Important Rule

Wait for the breakout. A pattern isn't confirmed until it breaks. Trading inside the pattern is gambling.

1

Identify the Pattern Early

Watch for patterns forming, but don't enter until confirmed. Early identification helps you plan entry, stop, and target.

2

Wait for the Break

Entry is triggered by the breakout - candle close beyond the pattern boundary. Don't jump the gun.

3

Watch for Volume

Ideally, volume decreases during pattern formation and increases on breakout. Volume confirms conviction.

4

Consider the Retest

Price often retests the broken boundary before continuing. This can offer better entry with tighter stop.

5

Respect the Measured Move

Use the pattern's height for target projection. Don't let greed extend your target without reason.

Target Calculation Methods

📏 Measured Move (Most Common)

Height of the pattern projected from the breakout point

Target = Breakout Point ± Pattern Height

Works for: H&S, Double Top/Bottom, Triangles, Flags

🎯 Fibonacci Extensions

Use Fibonacci 127.2%, 161.8% extension levels

Good for additional targets beyond measured move

🚧 Next S/R Level

The next significant support or resistance zone

Most conservative, highest probability

Key Takeaways

1

Head & Shoulders is the most reliable reversal pattern - learn it first and master it.

2

Triangles are continuation patterns - they usually break in the direction of the prior trend.

3

Rising wedges are bearish, falling wedges are bullish - counterintuitive but reliable.

4

Wait for the breakout - a pattern isn't confirmed until price breaks the boundary.

5

Use measured moves for targets - project the pattern height from the breakout.

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RSI & Oscillators

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Fibonacci Trading

Master the golden ratio and its trading applications.

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