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Chart Patterns

Chart patterns are recurring formations in price that signal the continuation or reversal of a trend. Mastering them gives you high-probability setups with clear entry, stop, and target levels.

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Continuation Patterns

  • Bull Flag: Strong upward move (flagpole) followed by a downward sloping channel. Break above = continuation. Target = flagpole height.
  • Bear Flag: Strong downward move followed by upward sloping channel. Break below = continuation downward.
  • Bull Pennant: Strong move then converging triangle with slight downward slope. Break above = continuation.
  • Ascending Triangle: Flat resistance + rising lows = buyers accumulating. Breakout above resistance.
  • Descending Triangle: Flat support + falling highs = sellers distributing. Breakdown below support.
  • Symmetrical Triangle: Converging highs and lows. Neutral — breakout direction = trade direction.

Pro Tip: For flags and pennants, the retracement should ideally be between 38.2% and 50% Fibonacci of the flagpole. Deeper retracements weaken the pattern.

Reversal Patterns

  • Head & Shoulders (H&S): Left shoulder, higher Head, right shoulder at similar level to left. Neckline break = sell signal. Most reliable reversal.
  • Inverse H&S: Opposite of above — left shoulder trough, lower head trough, right shoulder trough. Neckline break = buy signal.
  • Double Top: Two highs at approximately the same level. Break of the neckline (the low between the two tops) = sell.
  • Double Bottom: Two lows at similar level. Break of neckline = buy. W-shape pattern.
  • Triple Top / Triple Bottom: Like double top/bottom but with 3 touches — even more reliable.
  • Rounding Bottom (Cup): Gradual U-shaped reversal. When combined with a handle (small pullback), powerful breakout setup.

How to Measure Pattern Targets

For almost all chart patterns, the price target is calculated the same way: measure the height of the pattern and project that same distance from the breakout point.

Example — Head & Shoulders:
If the head is 200 pips above the neckline, the target after the neckline break is 200 pips below the neckline.

Example — Flag:
Measure the flagpole height (e.g. 150 pips). After flag breakout, target = entry + 150 pips.

Pro Tip: Only trade patterns that have a clear measured target of at least 1.5x your risk (stop loss distance). If the risk/reward is not there, skip the trade.

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Key Takeaways

  • Patterns form due to repetitive human behavior
  • Continuation patterns trade in the direction of the trend
  • Reversal patterns signal the end of a trend
  • Always measure the pattern height to project the target
  • Volume should increase on the breakout candle
  • False breakouts are common — wait for candle close
  • Head & Shoulders is the most reliable reversal pattern
  • Flags and pennants are the most common continuation patterns

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