Learn Price Action - Stage 4

Chart Patterns

Chart patterns are a way of identifying potential trades based on the shape and movement of a stock's price over time. Some common examples include head and shoulders, double tops and bottoms, and flag and pennant patterns. These patterns can signal a potential reversal or continuation of a current trend, and can be used in conjunction with other technical analysis tools to make trading decisions.

Types of Chart Patterns

There are several types of chart patterns that traders use to identify potential trades, some of the most common include:

• Reversal patterns: These patterns signal a potential change in trend and include head and shoulders, double tops and bottoms, and inverted head and shoulders.

• Continuation patterns: These patterns signal a continuation of the current trend and include flags, pennants, cup and handle.

• Trendline patterns: These patterns involve the intersection of price and trendlines, such as ascending and descending triangles.

• Gap patterns: These patterns involve a gap in the price chart, such as island reversals and breakaway gaps.

It's important to note that no single pattern can predict market movements with 100% accuracy and traders usually use more than one pattern and other technical analysis tools to make trading decisions.

Reversal Chart Patterns

Head and shoulders

The head and shoulders chart pattern is a reversal pattern that is considered a bearish signal, indicating that a stock or asset's price is likely to decline. The pattern is characterized by a peak (the head) followed by two lower peaks (the shoulders) on either side. The pattern is usually confirmed when the price falls below a support line that connects the two lows at the shoulders.

The key elements of this pattern include the following:

Left Shoulder: The first peak that forms after an uptrend Head: The highest peak that forms, where the price reaches a new high. Right Shoulder: The second peak that forms after the head, where the price makes a second attempt to reach the same high as the head but fails. Neckline: The line that connects the lows of the left and right shoulder

Inverted head and shoulders

The inverted head and shoulders chart pattern is a reversal pattern that is considered a bullish signal, indicating that a stock or asset's price is likely to rise. It is the opposite of the head and shoulders pattern, the inverted head and shoulders pattern is characterized by a trough (the head) followed by two higher troughs (the shoulders) on either side. The pattern is usually confirmed when the price rises above a resistance line that connects the two highs at the shoulders.

The key elements of this pattern include the following:

Left Shoulder: The first trough that forms after a downtrend Head: The lowest trough that forms, where the price reaches a new low Right Shoulder: The second trough that forms after the head, where the price makes a second attempt to reach the same low as the head but fails. Neckline: The line that connects the highs of the left and right shoulder

Double tops and bottoms

Double tops and double bottoms are chart patterns that signal a potential reversal in the price trend of a stock or asset. They are formed when the price reaches a similar high or low level twice, but is unable to break through it.

A double top is a bearish reversal pattern that is formed when the price of an asset reaches a high level twice, but is unable to break through it and falls back down. The pattern is confirmed when the price falls below a support line that connects the two lows.

A double bottom is a bullish reversal pattern that is formed when the price of an asset reaches a low level twice, but is unable to break through it and rises back up. The pattern is confirmed when the price rises above a resistance line that connects the two highs.

Rising and falling wedges

Rising and falling wedges are chart patterns that indicate a potential reversal in the price trend of a stock or asset. They are formed when the price of an asset moves in a wedge-like shape, with the trendline getting steeper over time.

A rising wedge is a bearish reversal pattern that is formed when the price of an asset moves upward in a wedge-like shape, with the trendline getting steeper over time. This pattern is characterized by a series of higher lows and higher highs, and is confirmed when the price falls below the lower trendline.

A falling wedge is a bullish reversal pattern that is formed when the price of an asset moves downward in a wedge-like shape, with the trendline getting steeper over time. This pattern is characterized by a series of lower highs and lower lows, and is confirmed when the price rises above the upper trendline.

Rounding top and bottom

Rounding top and bottom chart patterns are reversal patterns that signal a potential change in the trend of a stock or asset's price.

A rounding top is a bearish reversal pattern that is characterized by a gradual increase in the price of an asset followed by a gradual decrease, creating a rounded shape on the chart. The pattern is considered to be complete when the price breaks below the support line that connects the lows of the pattern.

A rounding bottom is a bullish reversal pattern that is characterized by a gradual decrease in the price of an asset followed by a gradual increase, creating a rounded shape on the chart. The pattern is considered to be complete when the price breaks above the resistance line that connects the highs of the pattern.

• Head and shoulders

• Inverted head and shoulders

• Double tops and bottoms

• Rising and falling wedges

• Rounding top and bottom

The head and shoulders chart pattern is a reversal pattern that is considered a bearish signal, indicating that a stock or asset's price is likely to decline. The pattern is characterized by a peak (the head) followed by two lower peaks (the shoulders) on either side. The pattern is usually confirmed when the price falls below a support line that connects the two lows at the shoulders.

The key elements of this pattern include the following:

Left Shoulder: The first peak that forms after an uptrend Head: The highest peak that forms, where the price reaches a new high. Right Shoulder: The second peak that forms after the head, where the price makes a second attempt to reach the same high as the head but fails. Neckline: The line that connects the lows of the left and right shoulder

Continuation Chart Patterns

• Flags

• Pennants

• Cup and Handle

A flag chart pattern is a continuation pattern that signals a potential continuation of the current trend. The pattern is formed by a sharp price movement in one direction, followed by a period of consolidation, which creates a rectangle shape on the chart. The pattern is usually considered complete when the price breaks out of the rectangle in the same direction as the initial sharp price movement.

A flag pattern can occur in both bullish and bearish trends, bullish flag patterns occur after an upward price movement, and bearish flag patterns occur after a downward price movement.

Trendline Chart Patterns

• Ascending Triangle

• Descending Triangle

• Wedge

• Channel

An ascending triangle chart pattern is a bullish continuation pattern that is formed by the intersection of a horizontal resistance level and an upward-sloping trendline. The pattern is characterized by a series of higher lows, and a resistance level that the price is unable to break through. The pattern is typically confirmed when the price breaks above the resistance level.

The key elements of this pattern include the following:

• Horizontal Resistance Level: a level where the price of the asset encounters selling pressure and fails to break above it

• Upward sloping trendline: connects the series of higher lows