Chart Pattern Recognition

Chart patterns are geometric shapes formed by price that can predict future price movement.

Continuation Patterns

Patterns that signal trend will likely continue:

Flags and Pennants

• Form after strong move (flagpole)
• Small consolidation pattern
• Break in direction of prior trend
• Target: measured move equal to flagpole

Triangles

• Flat resistance, rising support
• Usually breaks up

• Flat support, declining resistance
• Usually breaks down

• Converging trendlines
• Breaks in trend direction

Reversal Patterns

Head and Shoulders



• Three peaks, middle highest (head)
• Neckline connects the lows
• Break below neckline = bearish
• Target: height of head to neckline

Inverse Head and Shoulders

• Three troughs, middle lowest
• Break above neckline = bullish

Double Top/Bottom



• Two peaks at similar level
• Break below neckline = bearish

• Two troughs at similar level
• Break above neckline = bullish

Pattern Trading Rules

1. Wait for confirmation - pattern must complete
2. Volume matters - breakout should have increased volume
3. Measure targets - use pattern height for profit targets
4. Use stop-losses - place beyond pattern boundary
5. Time and price - patterns take time to form