A chart pattern is a shape within a price chart bound by at least two trend lines (straight or curved) and have a combination of entry and exit points.
- Trends
- Uptrend : Forces of demand (bulls) are in control.
- Downtrend : Forces of supply (bears) are in control.
- Types
- Reversal patterns : A change of trend and can be broken down into top and bottom formations i.e. A trend may be about to change direction.
- Double Top Reversal
- Double Bottom Reversal
- Triple Top Reversal
- Triple Bottom Reversal
- Head and Shoulders Top
- Head and Shoulders Bottom
- Falling Wedge
- Rising Wedge
- Rounding Bottom
- Bump and Run Reversal
- Continuation patterns : A pause in the trend and indicate that the previous direction will resume after a period of time i.e. An ongoing trend will continue.
- Flag (Pennant)
- Symmetrical Triangle
- Ascending Triangle
- Descending Triangle
- Rectangle
- Price Channel
- Measured Move – Bullish
- Measured Move – Bearish
- Cup and Handle
- Reversal patterns : A change of trend and can be broken down into top and bottom formations i.e. A trend may be about to change direction.
- Patterns can be seen in any charting time frame (weekly, daily, minute, etc.)
Reversal patterns
Double Top
- Bearish reversal pattern.
- Two successive peaks (either rounded or pointed) separated by an opposite reversal point (trough).
- The trend enters a reversal phase after failing to break through the resistance level twice.
- Shape: Letter M
- Prerequisite
- Prior trend: Significant uptrend.
- First peak : The first peak should mark the highest point of the current trend.
- Trough : The price retracing back to a level of support.
- Second peak : The price then climbs up once again with low volume and meets resistance from previous high.
- Decline : The second peak fails to break the resistance level or first peak level and declines again retracing back to the support threshold.
- Support break : The downtrend breaks through the support line (lowest point between the peaks) and completes the Double Top Reversal.
- Support turned into Resistance: Broken support becomes potential resistance.
- Price target: Price difference between the highest of pattern and the trough.
Double Bottom
- Bullish reversal pattern.
- Two successive trough (either rounded or pointed) separated by an opposite reversal point (peak).
- The trend enters a reversal phase after failing to break through the support level twice.
- Shape: Letter W
- Prerequisite
- Prior trend: Significant downtrend.
- First trough : The first trough should mark the lowest point of the current trend.
- Peak : The price retracing back to a level of resistance.
- Second trough : The price then decline off once again with low volume and meets support from previous low.
- Advance : The second trough fails to break the support level or first trough level and climbs again retracing back to the resistance threshold.
- Resistance break : The uptrend breaks through the resistance line (highest point between the troughs) and completes the Double Bottom Reversal.
- Resistance turned into Support: Broken resistance becomes potential support.
- Price target: Price difference between the lowest of pattern and the peak.
Triple Top
- Bearish reversal pattern.
- Three successive peaks (either rounded or pointed) separated by two opposite reversal points (troughs).
- The trend enters a reversal phase after failing to break through the resistance level thrice.
- Prerequisite
- Prior trend: Significant uptrend.
- First peak : The first peak should mark the highest point of the current trend.
- First trough : The price retracing back to a level of support.
- Second peak : The price then climbs up once again with low volume and meets resistance from previous high.
- Second trough : The price is again retracing back to a level of support.
- Third peak : The price then climbs up once again with low volume and meets resistance from previous high again.
- The highs do not have to be exactly equal, but should be reasonably equivalent to each other. As the Triple Top Reversal develops, overall volume levels usually decline.
- Decline : The third peak fails to break the resistance level or first peak level and declines again retracing back to the support threshold.
- Support break : The downtrend breaks through the support line (lowest point between the peaks) and completes the Triple Top Reversal.
- Support turned into Resistance: Broken support becomes potential resistance.
- Price target: Price difference between the highest of pattern and the trough.
Triple Bottom
- Bullish reversal pattern.
- Three successive trough (either rounded or pointed) separated by two opposite reversal points (peaks).
- The trend enters a reversal phase after failing to break through the support level thrice.
- Prerequisite
- Prior trend: Significant downtrend.
- First trough : The first trough should mark the lowest point of the current trend.
- First peak : The price retracing back to a level of resistance.
- Second trough : The price then decline off once again with low volume and meets support from previous low.
- Second peak: The price is again retracing back to a level of resistance.
- Third trough: The price then decline off once again with low volume and meets support from previous low again.
- The lows do not have to be exactly equal, but should be reasonably equivalent to each other. As the Triple Bottom Reversal develops, overall volume levels usually decline.
- Advance : The third trough fails to break the support level or first trough level and climbs again retracing back to the resistance threshold.
- Resistance break : The uptrend breaks through the resistance line (highest point between the troughs) and completes the Triple Bottom Reversal.
- Resistance turned into Support: Broken resistance becomes potential support.
- Price target: Price difference between the lowest of pattern and the peak.
Head and Shoulders Top
- Bearish reversal pattern.
- Three successive peaks (either rounded or pointed) with central peak higher than the other two peak, separated by two opposite reversal points (troughs) of support.
- Prerequisite
- Prior trend: Significant uptrend.
- Left shoulder : The first peak that mark the high point of the current trend.
- First trough : The price retracing back to complete the formation of the shoulder. The low of the decline usually remains above the trend line, keeping the uptrend intact.
- Head : The price then climbs up once again from first trough and exceeds the previous high forming the top of the head.
- Ideally, but not always, the volume during the advance of the left shoulder should be higher than during the advance of the head.
- Second trough : The price is again retracing back to marks the second point of the neckline. The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.
- Right shoulder : The price then climbs up once again from the low of the head and forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder.
- Neckline : The neckline is formed by joining the troughs (low points) 1 and 2.
- Trough 1 marks the end of the left shoulder and the beginning of the head.
- Trough 2 marks the end of the head and the beginning of the right shoulder.
- Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal.
- The slope of the neckline will affect the degree of bearishness of the pattern – a downward slope is more bearish than an upward slope.
- Decline and Support break : The price declines from the peak of the right shoulder and breaks through the support line (neckline).
- Support turned into Resistance: Broken support becomes potential resistance.
- Price target: Price difference between the head of pattern and the neckline.
- Warning signs
- The decrease in volume during advance of left shoulder and the new high of the head.
- The increase in volume during decline from the peak of the head, then decrement during the advance of the right shoulder.
- The increase in volume further during the decline of the right shoulder.
Head and Shoulders Bottom (Inverse Head and Shoulders)
- Bullish reversal pattern.
- Three successive troughs (either rounded or pointed) with central trough being the deepest than the other two troughs, separated by two opposite reversal points (peaks) of resistance.
- Prerequisite
- Prior trend: Significant downtrend.
- Left shoulder : The first trough that mark the low point of the current trend.
- First peak : The price retracing back to complete the formation of the shoulder. The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.
- Head : The price then decline off once again from first peak and exceeds the previous low forming the low of the head.
- Second peak : The price is again retracing back to marks the second point of the neckline. The high of the advance sometimes breaks a downtrend line, which calls into question the robustness of the downtrend.
- Right shoulder : The price then decline off once again from the high of the head and forms the right shoulder. This peak is higher than the head and usually in line with the low of the left shoulder.
- Neckline : The neckline is formed by joining the peaks (high points) 1 and 2.
- Peak 1 marks the end of the left shoulder and the beginning of the head.
- Peak 2 marks the end of the head and the beginning of the right shoulder.
- Depending on the relationship between the two high points, the neckline can slope up, slope down or be horizontal.
- The slope of the neckline will affect the degree of bearishness of the pattern – an upward slope is more bullish than a downward slope.
- Decline and Support break : The price climbs up from the low of the right shoulder and breaks through the resistance line (neckline).
- Resistance turned into Support: Broken resistance becomes potential support.
- Volume plays a crucial role in the Head and Shoulders Bottom formation. Volume levels during the first half of the pattern are less important than in the second half.
- Volume on the decline of the left shoulder is usually quite heavy and selling pressure quite intense. The intensity of selling may also continue during the decline that forms the low of the head. Following this low, subsequent volume patterns should be watched carefully to look for expansion during advances.
- The advance from the low of the head should show an increase in volume. After the formation of the second neckline point, the right shoulder’s decline should be accompanied with light volume. It is normal to experience profit-taking after an advance. Volume analysis helps to differentiate between normal profit-taking and heavy selling pressure.
- The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, expansion of volume is nearly must on the advance and during the breakout.
- Price target: Price difference between the head of pattern and the neckline.
Falling Wedge
Rising Wedge
Rounding Bottom
Bump and Run Reversal
