Chart Patterns
Chart patterns are shapes that price traces as buyers and sellers battle. Reversal patterns warn that a trend is ending; continuation patterns are pauses before the trend resumes. Each one gives you an entry, a stop and a target.
Head and Shoulders
Bearish reversalSpot it: Three peaks after an uptrend, the middle (head) highest. The line joining the two troughs is the neckline.
Entry: Sell or exit on a close below the neckline.
Stop: Just above the right shoulder.
Target: Head-to-neckline height, projected down from the breakout.
Inverse Head and Shoulders
Bullish reversalSpot it: Three troughs after a downtrend, the middle lowest. The mirror image of head and shoulders.
Entry: Buy on a close above the neckline, ideally on rising volume.
Stop: Just below the right shoulder.
Target: Head-to-neckline height, projected up from the breakout.
Double Top
Bearish reversalSpot it: Two peaks at about the same level, with a dip between them. Shaped like an 'M'.
Entry: Sell on a close below the low between the peaks.
Stop: Above the twin highs.
Target: Peak-to-trough height, projected down.
Double Bottom
Bullish reversalSpot it: Two lows at about the same level with a rally between them. Shaped like a 'W'.
Entry: Buy on a close above the high between the lows.
Stop: Below the twin lows.
Target: Trough-to-peak height, projected up.
Ascending Triangle
ContinuationSpot it: Flat resistance on top, rising lows below. Buyers are getting more aggressive.
Entry: Buy on a breakout above the flat top.
Stop: Below the last higher low.
Target: Height of the triangle's widest part, added to the breakout.
Descending Triangle
ContinuationSpot it: Flat support below, falling highs above. Sellers are pressing lower each time.
Entry: Sell on a breakdown below the flat support.
Stop: Above the last lower high.
Target: Height of the triangle, subtracted from the breakdown.
Symmetrical Triangle
ContinuationSpot it: Lower highs and higher lows converging. Volatility is compressing before a move.
Entry: Trade the direction of the breakout, usually in the direction of the prior trend.
Stop: Just inside the triangle on the opposite side.
Target: Height of the triangle's opening, projected from the breakout.
Bull Flag
ContinuationSpot it: A sharp rally (the pole) followed by a short, gentle, downward-sloping pullback (the flag).
Entry: Buy when price breaks above the top of the flag.
Stop: Below the flag's low.
Target: Length of the pole, added to the breakout.
Bear Flag
ContinuationSpot it: A sharp drop followed by a short, upward-sloping bounce. Sellers are resting, not done.
Entry: Sell when price breaks below the bottom of the flag.
Stop: Above the flag's high.
Target: Length of the pole, subtracted from the breakdown.
Cup and Handle
ContinuationSpot it: A rounded 'U'-shaped base followed by a small, shallow pullback (the handle) near the old high.
Entry: Buy on a breakout above the rim of the cup.
Stop: Below the handle's low.
Target: Depth of the cup, added to the breakout.
Rules that make patterns work
- Wait for the breakout to close beyond the line. Many patterns fail before they complete.
- Volume should expand on the breakout. A breakout on light volume is suspect.
- Bigger patterns on daily or weekly charts are more reliable than small intraday ones.
- Targets are estimates. Take partial profits on the way and trail your stop.
- If price quickly returns inside the pattern, the breakout has failed. Exit and reassess.
Educational information only, not investment advice. Market data may be delayed.
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