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Guide to Classic Chart Patterns

Triple Bottoms Double Bottoms
The Triple Bottom starts with prices moving downward, The Double Bottom pattern marks the reversal of a prior
followed by three sharp lows, all at about the same price level. downtrend. The price forms two distinct lows at roughly
Volume diminishes at each successive low and finally bursts as the same price level. For a more significant reversal, look for a
the price rises above the highest high, confirming the pattern longer period of time between the two lows. Volume reflects
as a sign of BULLISH price reversal. A Triple Top is the bearish a weakening of the downward pressure, tending to diminish
counterpart signaling the reversal of a prior uptrend to form as the pattern forms, with some pickup at each low, less on
a new downtrend. the second low. Finally the price breaks out above the highest
high to confirm the BULLISH signal. Strong volume on breakout
is always a good sign. The Double Top is the bearish
counterpart, marking the topping out of an uptrend
and initiation of a downtrend.

Triangles Flags & Pennants

A BULLISH Triangle shows two converging trendlines as prices A BULLISH Flag follows a steep rise in price called the “flagpole”,
reach lower or stable highs and higher lows. Volume diminishes often the reaction to a positive announcement. It’s marked by two
as the price swings back and forth between an increasingly narrow parallel trendlines around a period of consolidation that occurs as
range reflecting uncertainty in the market direction. Then well excitement subsides and volume decreases. The Flag can be
before the triangle reaches its apex, the price breaks out above the horizontal or slightly downward. Finally the price breaks the upper
upper trendline with a noticeable increase in volume, confirming trendline marking the resumption of the uptrend. Bearish Flags
the pattern as a continuation of the prior uptrend. Triangles can can be spotted during a steep drop in price with the flag horizontal
also appear during a downtrend, signaling a bearish continuation or slightly upward. Pennants are similar to flags however the
when the price penetrates the lower trendline. That can also be trendlines are converging rather than parallel.
seen as top or bottom patterns marking a trend reversal.

Upside Breakouts Head & Shoulders

An Upside Breakout occurs when the price breaks out through The Head and Shoulders Bottom (Reverse Head and Shoulders)
the top of a trading range marked by horizontal boundary lines is created by three successive declines in the price following
across the highs and lows. This pattern indicates that prices a significant downtrend. The lowest low (head) is in the middle,
may rise explosively over a period of days or weeks as a sharp flanked by two higher lows (shoulders) at roughly the same level.
uptrend appears. A breakout from a longer and narrower trading Volume is highest as the price makes the first two declines,
range makes for a stronger and more reliable BULLISH signal. then diminishes through the right shoulder. Finally volume
Conversely, a bearish Downside Breakout is observed when surges as the price closes above the neckline – drawn between
prices break out below the lower boundary. the two highs – to confirm the BULLISH reversal. The Head and
Shoulders Top is the bearish counterpart signaling a major trend
reversal downward.

Diamonds Rounded Bottoms

Diamond patterns usually form over several months in very Following a downtrend, the Rounded Bottom forms a gradual
active markets. Volume will remain high during the formation bowl shape reflecting a gradual shift in the balance of supply
of this pattern. The pattern begins as prices create higher highs and demand. Volume tends to mirror the price pattern,
and lower lows in a broadening pattern. Then the trading range decreasing as bearishness wanes and investors become
gradually narrows after the highs peak and the lows start trending indecisive. Following a period of relative inactivity, at the
upward. The direction of the breakout signals the resolution bottom of the bowl, the price pattern starts its upward turn.
to a new trend—upward or downward out of the diamond’s As sentiment becomes more decisively bullish, volume tends
boundary lines. This pattern can mark the resumption of a prior to increase. The BULLISH pattern is confirmed when the price
trend (Continuation Diamond) or a significant trend reversal crosses above its moving average. The outcome sees volume
(Diamond Top or Bottom). reach a climactic peak in a few days of nearly vertical price
movement on the chart.

Megaphones Wedges
The rare Megaphone Bottom—a.k.a. Broadening Pattern—can A BULLISH Continuation Wedge consists of two converging
be recognized by its successively higher highs and lower lows, trend lines. Unlike the Triangles where the apex is pointed to
which form after a downward move. The BULLISH pattern is the right, the apex of this pattern is slanted downwards at an
confirmed when, usually on the third upswing, prices break angle. This is because prices edge steadily lower in a converging
above the prior high but fail to fall below this level again. pattern i.e. there are lower highs and lower lows. Over the weeks
The bearish counterpart is the Megaphone Top. or months that this pattern forms the trend appears downward
but the long-term range is still upward. Volume should diminish
as the pattern forms. The pattern is confirmed when prices break
above the upper trendline. The bearish counterpart appears
with converging trendlines pointing slightly upward.

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