CHART PATTERNS FOR PRICE ACTION

TRADING

PART 2 : PRICE ACTON

• Reversal Chart Patterns
• 1. Head & Shoulders
• 2. Double Top / Double Bottom
• 3. Triple Top / Triple Bottom
• 4. Rounding Top / Rounding Bottom
• 5. Island Reversal
• Continuation Chart Patterns
• 6. Rectangle
• 7. Wedge
• 8. Triangle
• 9. Flag
• 10. Cup & Handle
 1. HEAD & SHOULDERS
• WHAT DOES A HEAD & SHOULDERS PATTERN LOOK LIKE?
• The bullish pattern has three swing lows. The middle swing low is the lowest. The line connecting
the two swing highs is the neckline.
• The bearish pattern has three swing highs. The middle swing high is the highest. The line
connecting the two swing lows is the neckline.

WHAT DOES A HEAD & SHOULDERS PATTERN MEAN?

In the bullish instance, the left shoulder and the head
highlight the downwards trend. The right shoulder, by
ending above the head, halts the bearish trend.
The break of the neckline then confirms a change of
trend. Hence, the Head & Shoulders pattern is a
reversal chart pattern.
The same logic works for the bearish pattern as well.
 HOW DO WE TRADE A HEAD & SHOULDERS
PATTERN?
• As it is a reversal chart pattern, we need an existing trend to reverse.
• A bullish pattern must take place in a downwards trend, and a bearish pattern should take place
in a upwards trend.
• Generally, the longer the trend, the larger the Head & Shoulders formation needed to reverse it.
• For a bullish pattern, buy:

• On break-out above the neckline; or

• On pullback to the neckline after the break-out.
• For a bearish pattern, sell:
• On break-out below the neckline; or
• On pullback to the neckline after the break-out.
• Volume should increase on break-out.
 2. DOUBLE TOP / DOUBLE
BOTTOM
• WHAT DOES A DOUBLE TOP / BOTTOM PATTERN LOOK LIKE?
• A Double Bottom has two swing lows at around the same price level. The swing high in between them projects a resistance
line.
• A Double Top has two swing highs at around the same price level. The swing low in between them projects a support line.

WHAT DOES A DOUBLE TOP / BOTTOM PATTERN

MEAN?

In a Double Bottom, the first swing low marks the

extreme low of a downwards trend. When the second
swing low fails to push below it, it is a warning that a
reversal might occur. Once the market breaks above
the resistance level, it confirms the bullish reversal.
In a Double Top, the same logic applies and leads to a
bearish reversal.
 HOW DO WE TRADE A DOUBLE TOP /
BOTTOM PATTERN?
• HOW DO WE TRADE A DOUBLE TOP / BOTTOM PATTERN?
• As it is a reversal chart pattern like the Head & Shoulders, we must have a trend for the pattern to reverse.

• Do not look for reversal patterns like the Double Top / Bottom in a sideways market.

• For a bullish pattern, buy:

• On break-out above the resistance line; or
• On pullback to the resistance line (now acting as support) after the break-out.
• For a bearish pattern, sell:
• On break-out below the support line; or
• On pullback to the support line (now acting as resistance) after the break-out.
• Volume should increase as price breaks out of the resistance/support line.

• To get the target objective, measure the height of the pattern and project it from the break-out point.
 3. TRIPLE TOP / TRIPLE BOTTOM

• WHAT DOES A TRIPLE TOP / BOTTOM PATTERN LOOK LIKE?

• If you can find a Double Top / Bottom, looking for a Triple Top / Bottom is straightforward.
• A Triple Bottom has three swing lows at around the same price level, and a Triple Top has three swing highs at
around the same price level.
• You can also relate it to the Head & Shoulders chart pattern. Just that in this case, the middle pivot is equal to
the other two pivots.

WHAT DOES A TRIPLE TOP / BOTTOM PATTERN MEAN?

The Triple Bottom represents two failed attempts to push below the
support established by the first swing low. Naturally, it hints at a trend
reversal. A break-out above the resistance line confirms the reversal.
Similarly, the Triple Top shows two unsuccessful tries to continue an
upwards trend and signifies a bearish reversal.
 HOW DO WE TRADE A TRIPLE TOP / BOTTOM PATTERN?
• The trading method is akin to the Double Top / Bottom chart pattern.
• For a Triple Bottom chart pattern, buy:
• On break-out above the resistance line; or
• On pullback to the resistance line (now acting as support) after the break-out.

However, drawing the resistance line of a Triple Bottom might be tricky,

especially if the two swing highs are unequal.
In that case, you can draw the resistance line:
•With the higher swing high; or
•With the second swing high; or
•Somewhere in the middle of the two swing highs.
For a Triple Top chart pattern, sell:
•On break-out below the support line; or
•On pullback to the support line (now acting as resistance) after the break-out.
You can draw the support line of a Triple Top pattern:
•With the lower swing low; or
•With the second swing low; or
•Somewhere in the middle of the two swing lows.
 • Volume : Should increase when price breaks out of the resistance/support line. It should also
decrease with each upswing in the case of a Triple Top. For a Triple Bottom, volume should
decrease with each down swing.

For the target objective, measure the

height of the pattern and project it
from the break-out point
 4. ROUNDING TOP / ROUNDING BOTTOM
• WHAT DOES A ROUNDING TOP / BOTTOM PATTERN LOOK LIKE?
• A Rounding Top consists of minor price swings that rise and fall gradually, presenting a
dome shape at the top of the chart.
• Flip a Rounding Top vertically, and it becomes a Rounding Bottom.
• Rounding Tops / Bottoms usually take a long time to form and are found more often on
weekly charts.

WHAT DOES A ROUNDING TOP / BOTTOM PATTERN MEAN?

A Rounding Top shows a gradual change of market sentiment from bullish to bearish.
A Rounding Bottom implies a sentiment change from bearish to bullish.
This reversal formation is relatively subdued.
 HOW DO WE TRADE A ROUNDING TOP / BOTTOM PATTERN?

• For a Rounding Bottom chart pattern, buy when

price closes above the high of the pattern.
• For a Rounding Top chart pattern, sell when
price closes below the low of the pattern.

• You can take a more aggressive entry by looking

for short-term price patterns before the
completion of the pattern, especially if the
volume pattern is encouraging.
• Volume should decrease towards the middle of
the pattern and rises again towards the end of
it.
• For the target objective, measure the height of
the pattern and project it from the break-out
point.
 CONTINUATION CHART PATTERNS

• As price retraces in a trending market, it forms a variety of continuation

chart patterns.
• To find these chart patterns, simply draw two lines to contain the
retracing price action. Draw one line above the retracement (“resistance”)
and one line below it (“support”).
• As you will see below, the relationship between these two lines will help
us differentiate the continuation chart patterns
 RECTANGLE
• WHAT DOES A RECTANGLE PATTERN LOOK LIKE?
• If two horizontal lines surround a retracement, it is a Rectangle chart pattern.
• Both the bullish and bearish Rectangle patterns looks the same. However, they
appear in different trend context.

WHAT DOES A RECTANGLE PATTERN MEAN?

A Rectangle chart pattern indicates sideways action.
When the market enters in a congestion phase, it is
likely to break out in the direction of the preceding
trend.
 HOW DO WE TRADE A RECTANGLE PATTERN?

• Remember That The Trend Before The Rectangle

Chart Pattern Determines If The Pattern Is Bullish Or
Bearish. A Rectangle Pattern Continues The Prior
Trend.

For a bullish pattern, buy:

On break-out above the resistance line; or
On pullback to the resistance line (now acting as
support) after the break-out.
For a bearish pattern, sell:
On break-out below the support line; or
On pullback to the support line (now acting as
resistance) after the break-out.
Volume should increase when price breaks out of the
resistance/support line.
For the target objective, measure the height of the
Rectangle and project it from the break-out point.
 WEDGE
• WHAT DOES A WEDGE PATTERN LOOK LIKE?
• For a Wedge pattern pullback, the two lines converge.
• A bullish Wedge chart pattern takes place in an upwards trend, and the lines
slope down. It is also known as a Falling Wedge.
• A bearish Wedge chart pattern is found in a downwards trend, and the lines
slope up. (Rising Wedge)

What Does A Wedge Pattern Mean?

The defining feature of a Wedge chart pattern is the set of
converging trend lines.
It means that the magnitude of the swings within the Wedge
pattern is decreasing. This contraction in swing
magnitude implies that the Wedge is moving against the path
of least resistance.
Hence, when the market moves decisively with the trend,
it confirms that the trend is resuming.
 HOW DO WE TRADE A WEDGE PATTERN?

• For a bullish pattern, buy when price

breaks above the resistance.
• For a bearish pattern, sell when price
breaks below the support.
• Volume should decrease as the
Wedge pattern forms, and increase
with the break-out.
• For the target objective, measure the
height of the entire Wedge pattern and
project it from the break-out point.
  TRIANGLE
• WHAT DOES A TRIANGLE PATTERN LOOK LIKE?

 There are three types of triangle chart patterns.

 Ascending
 Descending
 Symmetrical

 We can describe each variant easily with the two trend lines surrounding the retracement,
 An ascending triangle has a horizontal resistance and a rising support. (Example on the right.)
 A descending triangle has a falling resistance and a horizontal support. (Example below.)
 A symmetrical triangle has a rising support and falling resistance. The support line and the resistance
line should slope at similar angles to produce the symmetry. (Example on investopedia.)
WHAT DOES A TRIANGLE PATTERN MEAN?
An Ascending Triangle pattern is a bullish chart pattern. It shows the market
in a pause during an upwards trend. However, the rising swing lows imply
bullishness.

By the same logic, a Descending Triangle pattern, with the lower swing highs,
is a bearish pattern.

The Symmetrical Triangle is a continuation pattern as well. However, its

directional tendency is less obvious. It depends on the trend in which it
forms. Thus, it is bullish when it forms in a bull trend and bearish in a
downwards trend.
 HOW DO WE TRADE A TRIANGLE PATTERN?

• In A Bull Trend, Buy On Break-out Above An

Ascending Triangle Or A Symmetrical Triangle.

• In a bear trend, sell on break-out below a

Descending Triangle or a Symmetrical Triangle.
• Volume should decrease as the Triangle chart
pattern forms, and increase with the break-out.
• For the target objective, measure the height of
the widest part of the Triangle and project it from
the break-out point.
  WHAT DOES A FLAG PATTERN LOOK LIKE?
A FLAG PATTERN HAS A FLAG POLE AND A FLAG.

The flag pole is a sharp thrust in the direction of the trend. Identifying the flag pole is
critical for the Flag pattern. Look for strong and obvious price thrusts with consecutive
bars, gaps, and strong volume in the same direction.

For a bullish Flag pattern, we need an upthrust as the flag pole. The flag is made up of
two parallel lines that slope downwards.

The bearish Flag pattern has a downward thrust as the flag pole.  The two lines making
up the flag are also parallel, but slope upwards.
(A related chart pattern is the Pennant Pattern, which is essentially a flag pole with
a Triangle pattern as the flag.)

WHAT DOES A FLAG PATTERN MEAN?

The key feature of a Flag pattern is the flag pole which is a powerful price move. The
Flag pattern represents a short break before the market continues moving in the same
direction.
Hence, it is an ideal continuation chart pattern.
 HOW DO WE TRADE A FLAG PATTERN?

• Buy on break-out above a bullish Flag pattern.

• Sell on break-out below a bearish Flag pattern.
• Volume should decrease as the Flag pattern
forms, and increase with the break-out.
• The target projection for a Flag pattern is
different from the other chart
patterns. Measure the height of the flag pole.
Then, extend it from the lowest point of a
bullish flag or the highest point of a bearish
flag.
 CUP & HANDLE
• WHAT DOES A CUP & HANDLE PATTERN
LOOK LIKE?
• The cup looks like a Rounding Bottom. The
handle, which follows the cup, looks like a
typical retracement (for e.g. Wedge, Flag).
• The Cup & Handle chart pattern is a WHAT DOES A CUP & HANDLE PATTERN MEAN?
bullish pattern. Its bearish counterpart is A Cup & Handle pattern is basically a Rounding Bottom
the Inverted Cup & Handle pattern. following by a pullback. Hence, it marks a period of
consolidation in which the bulls take over from the
bears gradually.
The last retracement (handle) is the last bearish push.
When it fails, we expect the market to rise.
An Inverted Cup & Handle pattern follows a similar
logic with a Rounding Top and a pullback upwards.
 List of Important points:
1.Cup
The Cup is usually “U” shaped and may be considered as a rounding
bottom with almost equal highs on the either side. However, a “V”
shaped cup also qualifies as a Cup and Handle pattern but the conviction
is higher in “U” shaped due to the consolidation at the bottom.
2.Handle
The handle is usually the pullback from the higher end of the cup which
may be rounding, triangle or a descending channel. Usually the pullback
is about 1/3rd of the size of prior advance.
3.Volume pattern
The breakout from the handle’s resistance should be accompanied
with increased volume thus conforming the same.
4.Period
The cup usually forms over a period of 1-6 months or even longer
those formed in weekly and monthly charts. The handle ideally forms
over a span of 1-4 weeks or even higher depending upon the time
period of cup.
5.Target
The projected target from the breakout is usually the vertical distance
from the high to the bottom of the cup.
6. Stop loss
Traders may place stop loss at the lowest point of the handle and may
trail it to recent swing low as the stock makes a higher high within the
consolidation area of the handle; depending upon the risk appetite of
the trader.