Chart Patterns
Technical Analysis • Intermediate Level
Understanding chart patterns helps pinpoint potential trend continuations and reversals. These visual formations represent the collective psychology of market participants and provide valuable insights for timing entries and exits in stock positions.
Chart Pattern Categories
Basic Patterns
Foundation patterns including Head & Shoulders, Triangles, and Support/Resistance levels
Advanced Patterns
Complex formations including Flags, Pennants, Wedges, and Cup & Handle patterns
1Reversal Patterns
Head and Shoulders (Bearish Reversal)
Pattern Formation:
- • Left Shoulder: Initial peak with moderate volume
- • Head: Higher peak with declining volume
- • Right Shoulder: Lower peak at similar level to left shoulder
- • Neckline: Connect troughs between shoulders
Trading Strategy:
- • Signal: Break below neckline confirms reversal
- • Target: Height from head to neckline subtracted from breakout
- • Stop Loss: Place above right shoulder peak
- • Volume: Should increase on neckline break
Inverse Head and Shoulders (Bullish Reversal)
Pattern Formation:
- • Left Trough: Initial low with selling pressure
- • Head: Deeper low with climax selling
- • Right Trough: Higher low showing strength
- • Neckline: Connect peaks between troughs
Trading Strategy:
- • Signal: Break above neckline confirms reversal
- • Target: Height from neckline to head added to breakout
- • Stop Loss: Place below right shoulder low
- • Volume: Should surge on neckline break
Double Top & Double Bottom
Double Top (Bearish):
- • Two peaks at similar highs with valley between
- • Second peak often has lower volume
- • Break below valley confirms reversal
- • Target: Peak height subtracted from breakdown
Double Bottom (Bullish):
- • Two troughs at similar lows with peak between
- • Second low shows buying interest
- • Break above peak confirms reversal
- • Target: Trough depth added to breakout
2Continuation Patterns
Triangle Patterns
Ascending Triangle
- • Horizontal resistance
- • Rising support line
- • Bullish bias
- • Break above resistance = buy signal
Descending Triangle
- • Horizontal support
- • Falling resistance line
- • Bearish bias
- • Break below support = sell signal
Symmetrical Triangle
- • Converging trendlines
- • Neutral until breakout
- • Direction = trend continuation
- • Volume decreases during formation
Flags and Pennants
Flags:
- • Formation: Parallel trendlines sloping against preceding trend
- • Flagpole: Sharp move with high volume
- • Signal: Breakout continues prior trend
- • Duration: Usually 1-4 weeks
Pennants:
- • Formation: Small symmetrical triangle
- • Pole: Strong directional move
- • Signal: Breakout from triangle continues trend
- • Target: Height of pole projected from breakout
Volume Pattern: High volume on the pole formation, contracting volume through the flag/pennant consolidation, then volume surge at the breakout confirmation.
Cup and Handle
Formation Characteristics:
- • Cup: Rounded U-shape reflecting consolidation
- • Handle: Shallow pullback on right side
- • Duration: Best on weekly charts (months to form)
- • Depth: Cup should be 12-33% deep
Trading Guidelines:
- • Signal: Break above handle resistance
- • Target: Cup depth added to breakout level
- • Volume: Higher entering cup, lower in handle, spike at breakout
- • Best for: Swing and position trading
3Wedge Patterns (Reversal & Continuation)
Rising Wedge (Reversal)
Characteristics:
- • Two converging, upward-sloping trendlines
- • Volume declines as wedge forms
- • Bearish divergence pattern
Trading Signal:
- • Break below lower trendline = bearish reversal
- • Target: Wedge height subtracted from breakdown
- • Volume uptick confirms breakdown
Falling Wedge (Reversal)
Characteristics:
- • Two converging, downward-sloping trendlines
- • Volume diminishes during formation
- • Bullish reversal pattern
Trading Signal:
- • Break above upper trendline = bullish reversal
- • Target: Wedge height added to breakout
- • Volume increase confirms breakout
Key Insight: Wedges against the prevailing trend are more reliable as reversal signals. Always confirm with volume behavior and broader market context.
4Support & Resistance Levels
Support Levels
- • Definition: Price floor where demand outweighs supply
- • Identification: Multiple bounces at similar price levels
- • Psychology: Buyers step in, preventing further decline
- • Strength: More touches = stronger support
Resistance Levels
- • Definition: Price ceiling where supply outweighs demand
- • Identification: Repeated rejections at similar highs
- • Psychology: Sellers emerge, capping upward movement
- • Strength: More rejections = stronger resistance
Role Reversal Principle
Once a support or resistance level is decisively broken, it often reverses its role:
Broken Support → New Resistance
Previous buyers become sellers on any rally back to the broken support level, creating new resistance.
Broken Resistance → New Support
Previous sellers become buyers on any pullback to the broken resistance level, creating new support.
📊Pattern Summary & Trading Guidelines
| Pattern | Type | Reliability | Duration | Price Target |
|---|---|---|---|---|
| Head & Shoulders | Reversal | High | Medium term | Head height subtracted from neckline |
| Triangles | Continuation | Medium | Short-Medium term | Triangle height projected |
| Flags | Continuation | Medium | Short term | Flagpole height projected |
| Pennants | Continuation | Medium | Short term | Pole height projected |
| Rising Wedge | Reversal | High | Medium term | Wedge width subtracted |
| Falling Wedge | Reversal | High | Medium term | Wedge width added |
| Cup & Handle | Continuation | High | Long term | Cup depth added to breakout |
| Rounding Bottom | Reversal | Medium | Long term | Basin depth added to breakout |
| Broadening Formation | Mixed | Low | Variable | Unreliable - focus on risk management |
Best Practices & Common Pitfalls
Best Practices
- Always confirm patterns with volume behavior
- Ensure a preceding trend exists for continuation patterns
- Use stop-loss just beyond opposite trendline
- Combine with moving averages for higher conviction
Common Pitfalls
- Trading incomplete or distorted patterns
- Ignoring volume confirmation signals
- Using patterns on low-liquidity stocks
- Forcing patterns that don't clearly exist