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Chart Patterns

This chapter discusses classical chart patterns that can indicate reversals or continuations of trends in stock prices. It describes common reversal patterns like head and shoulders and double/triple tops and bottoms, as well as continuation patterns like triangles, flags, pennants and wedges. These patterns form recognizable geometric shapes on price charts over time periods ranging from weeks to months. Breakouts from these patterns can provide trading signals about whether a trend will reverse or continue.

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Lalu god
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31 views

Chart Patterns

This chapter discusses classical chart patterns that can indicate reversals or continuations of trends in stock prices. It describes common reversal patterns like head and shoulders and double/triple tops and bottoms, as well as continuation patterns like triangles, flags, pennants and wedges. These patterns form recognizable geometric shapes on price charts over time periods ranging from weeks to months. Breakouts from these patterns can provide trading signals about whether a trend will reverse or continue.

Uploaded by

Lalu god
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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A HANDBOOK OF TECHNICAL ANALYSIS

CHAPTER- 4

Classical Chart
patterns
A HANDBOOK OF TECHNICAL ANALYSIS

Chapter 4: Classical Chart Patterns:

As we have discussed in the previous section, that market can be either in trending phase or in a range-bound
phase. No trend generally lasts forever in the market. After prolonged or medium or shorter duration up and
downtrend, the market often reverses and a move starts in the opposite direction of the prior move. Often we
find that well defined geometrical patterns are formed in the chart which provides good indication of price
reversals. These patterns are called reversal classical chart patterns. When they are formed as a bullish reversal
pattern they are said to be part of accumulation. On the other hand if they are formed at the top of a price
move just before bearish reversal, then they are part of distribution.

However, a geometrically shaped consolidation does not necessarily mean price reversal. Often price resumes
the erstwhile trend post the consolidation move. These are called continuation classical chart pattern. We will
discuss about few of the classical chart patterns in the following section.

4.1: Head and Shoulder & Inverse Head & Shoulder:


Head and Shoulder pattern is a bearish reversal pattern. This pattern appears after an uptrend. This pattern is
formed with three consecutive tops with middle one being higher than the other two. The middle top is called
the head and the two side peaks are called the shoulders. On joining the intermediate troughs, we get the
neck-line. On ultimate break below the neckline, usually a short trade is taken with a stop-loss above the top
of the nearest shoulder. The target is usually considered as the distance between the neckline and head,
projected from the point of break. If the volume in the down leg of the right shoulder is on the higher side and
break happens with high volume, the conviction is on the higher side for the reversal.
A HANDBOOK OF TECHNICAL ANALYSIS

Figure 4.1: Head and Shoulder Pattern

An Inverse Head and Shoulder is just mirror image of the Head and Shoulder pattern. This should appear
after a sustained down trend, the rule of stop loss and target are similar. This often acts as a very effective
bullish reversal pattern.

4.2 Double Tops and Bottoms:


These chart patterns are well-known patterns that signal a trend reversal – these are considered to be one of
the most reliable patterns and are commonly used. These patterns are formed after a sustained trend and
signal to chartists that the trend is about to reverse. These patterns are created when price movement tests
support or resistance levels twice and is unable to break through. These patterns are often used to signal
intermediate and long-term trend reversals.

Figure 4.2: Double Tops and Bottoms


A HANDBOOK OF TECHNICAL ANALYSIS

4.3: Triple Tops and Bottoms:


These are another set of reversal chart patterns in chart analysis. These are not as prevalent in charts as Head
and Shoulders and Double Tops and Bottoms, but they act in a similar fashion. These two chart patterns are
formed when the price movement tests a level of support or resistance three times and is unable to break
through. They signal a reversal of the prior trend. A trade entry is initiated at the break of a neckline with a
small stop-loss and the target is measured as the distance between peaks/troughs and the neckline.

Figure 4.3: Triple Tops and Bottoms


A HANDBOOK OF TECHNICAL ANALYSIS

4.4 Triangles:
Triangles are one of the most well-known chart patterns used in technical analysis. The three most common
types of triangles, which vary in construction and implications, are Symmetrical Triangle, Ascending Triangle
and Descending Triangle. These chart patterns are considered to last anywhere from a couple of weeks (ideally
more than 12 weeks) to several months. These are areas of consolidations after a trending move and are
generally continuation patterns, i.e. the erstwhile trends resumes after the breakout. However, in certain cases
they act as reversal patterns. They can appear both in up-trend and down-trend.

Figure 4.4: Three Kinds of Triangle Patterns


A HANDBOOK OF TECHNICAL ANALYSIS

4.5: Flag and Pennant:


These two short-term chart patterns are continuation patterns that are formed when there is a sharp price
movement followed by a generally sideways price movement. The patterns are generally thought to last from
one to three weeks (Can last from 1 to 12 week but ideally they should last between 1 and 4 weeks). They can
appear both in up-trend and down-trend.

Figure 4.5: Flags and Pennants


A HANDBOOK OF TECHNICAL ANALYSIS

4.6 Wedge:
The Wedge chart pattern can be either a continuation or reversal pattern. It is similar to a Symmetrical Triangle
except that the Wedge Pattern slants in an upward or downward direction, while the symmetrical triangle
generally shows a sideways movement. The other difference is that Wedges tend to form over longer periods,
usually between three and six months. The fact that Wedges are classified as both continuation and reversal
patterns, can make reading signals confusing. However, at the most basic level, a falling wedge in an uptrend
is bullish and a rising wedge in a downtrend is considered bearish.

Figure4.6: Wedges

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