Chart patterns are visual representations of price movements that can provide insights into potential future market behavior. They are categorized into two main types: Continuation Patterns and Reversal Patterns. Continuation patterns suggest that the prevailing trend will continue after a period of consolidation. Reversal Patterns indicate that the current trend is likely to reverse direction.
Continuation Patterns
- Bullish Flag
- Bearish Flag
- Bullish Pennant
- Bearish Pennant
- Symmetrical Triangle
- Ascending Triangle
- Descending Triangle
- Bullish Rectangle
- Bearish Rectangle
- Cup and Handle
Reversal Patterns
- Head and Shoulders
- Inverse Head and Shoulders
- Double Top
- Double Bottom
- Triple Top
- Triple Bottom
- Rounded Top
- Rounded Bottom
- Rising Wedge
- Falling Wedge
Bullish Flag
A small rectangle pattern that slopes against the prevailing uptrend, indicating a pause before the trend continues upward.
Key Characteristics
- A steep upward price move (the flagpole) before the flag formation.
- The price consolidates between two parallel trendlines, which slope against the initial price move (downward).
- The pattern is confirmed when the price breaks out in the same direction as the flagpole (upward).
Price Target
- Measure the height of the flagpole (the vertical distance of the initial price move).
- Add this distance from the breakout point (where the price breaks above the top of the flag).
Price Target = Breakout Point + (Length of Flagpole)
Bearish Flag
Similar to a bullish flag but slopes upward, indicating a pause before the trend continues downward.
Key Characteristics
- A steep downward price move (the flagpole) before the flag formation.
- The price consolidates between two parallel trendlines, which slope against the initial price move (upward).
- The pattern is confirmed when the price breaks out in the same direction as the flagpole (downward).
Price Target
- Measure the height of the flagpole (the vertical distance of the initial price move).
- Subtract this distance from the breakout point (where the price breaks below the bottom of the flag).
Price Target = Breakout Point - (Length of Flagpole)
Bullish Pennant
A small symmetrical triangle that forms after a sharp upward move, indicating the trend will continue upward.
Key Characteristics
- A steep upward price move (the flagpole) before the pennant formation.
- The price consolidates in a small symmetrical triangle with converging trendlines (the pennant).
- The pattern is confirmed when the price breaks out in the same direction as the flagpole (upward).
Price Target
- Measure the height of the flagpole (the vertical distance of the initial price move).
- Add this distance to the breakout point (where the price breaks above the top of the pennant).
Price Target = Breakout Point + (Length of Flagpole)
Bearish Pennant
Similar to a bullish pennant but forms after a sharp downward move, indicating the trend will continue downward.
Key Characteristics
- A steep downward price move (the flagpole) before the pennant formation.
- The price consolidates in a small symmetrical triangle with converging trendlines (the pennant).
- The pattern is confirmed when the price breaks out in the same direction as the flagpole (downward).
Price Target
- Measure the height of the flagpole (the vertical distance of the initial price move).
- Subtract this distance from the breakout point (where the price breaks below the bottom of the pennant).
Price Target = Breakout Point - (Length of Flagpole)
Ascending Triangle
A flat upper trend line and a rising lower trend line, indicating a potential upward breakout.
Key Characteristics
- The price hits a horizontal resistance level multiple times.
- The price makes higher lows, forming a triangle.
- The pattern is confirmed when the price breaks above the resistance line.
Price Target
- Measure the height of the triangle (the vertical distance between the flat resistance line and the lowest point on the rising support line).
- Add that distance to the breakout point.
Price Target = Breakout Point + (Height of Triangle)
Descending Triangle
A flat lower trend line and a descending upper trend line, indicating a potential downward breakout.
Key Characteristics
- The price hits a horizontal support level multiple times.
- The price makes lower highs, forming a triangle.
- The pattern is confirmed when the price breaks below the support line.
Price Target
- Measure the height of the triangle (the vertical distance between the flat support line and the highest point on the falling resistance line).
- Subtract that distance from the breakdown point.
Price Target = Breakout Point - (Height of Triangle)
Symmetrical Triangle
The Symmetrical Triangle is a continuation pattern that can occur during either an uptrend or a downtrend. It is characterized by converging trendlines where both the upper trendline slopes downward and the lower trendline slopes upward, creating a triangle shape. The breakout direction typically follows the existing trend.
Key Characteristics
- A downward sloping upper trendline is formed with the price makes lower highs. An upward sloping lower trendline is formed with the price makes higher lows. These trendlines converge, forming a triangle.
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Price movement becomes tighter as the pattern progresses, indicating a phase of consolidation.
The pattern reflects market indecision, as buyers and sellers battle to determine the next move. -
The pattern is confirmed when the price breaks out above the upper trendline (in an uptrend) or breaks down below the lower trendline (in a downtrend).
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Volume typically decreases during the formation of the triangle and increases sharply during the breakout or breakdown.
Price Target
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Determine the vertical distance between the highest point (at the beginning of the pattern) and the lowest point (at the beginning of the pattern).
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Add (in the case of an upward breakout) or subtract (in the case of a downward breakdown) this distance from the breakout or breakdown point.
Price Target = Breakout Point ± (Height of Triangle)
Bullish Rectangle
A bullish rectangle forms during an uptrend, where the price consolidates between a resistance and support level before breaking upward to continue the trend.
Key Characteristics
- The pattern forms during an uptrend as the price pauses to consolidate.
- The price moves between a horizontal resistance (upper boundary) and horizontal support (lower boundary) level, creating a sideways range.
- The price should test both the support and resistance levels at least twice.
- A bullish rectangle is confirmed when the price breaks above the resistance level, signaling a continuation of the uptrend.
Price Target
- Measure the height of the rectangle (the distance between the resistance and support levels).
- Add this height to the breakout point (where the price breaks above resistance).
Price Target = Breakout Point + (Resistance - Support)
Bearish Rectangle
A bearish rectangle forms during a downtrend, where the price consolidates between resistance and support before breaking downward to continue the bearish trend.
Key Characteristics
- The pattern forms during a downtrend as the price consolidates.
- The price moves between horizontal resistance (upper boundary) and horizontal support (lower boundary) levels.
- The price should test both the resistance and support levels at least twice.
- A bearish rectangle is confirmed when the price breaks below the support level, signaling a continuation of the downtrend.
Price Target
- Measure the height of the rectangle (the distance between the resistance and support levels).
- Subtract this height from the breakdown point (where the price breaks below support).
Price Target = Breakout Point - (Resistance - Support)
Cup and Handle
The Cup and Handle pattern is a bullish continuation pattern that signals the potential for an upward breakout after a period of consolidation. It resembles the shape of a tea cup, with a rounded bottom (the cup) followed by a smaller consolidation (the handle) before a breakout.
Key Characteristics
- The cup portion of the pattern forms a U-shaped curve, indicating a period of consolidation or accumulation after a prior uptrend. The cup should have a moderate depth (typically retracing 30-50% of the previous advance) and both sides of the cup should be relatively symmetrical, with equal highs on either side of the cup.
- After the cup forms, the price pulls back slightly, forming a handle. The handle should not retrace more than 50% of the cup's depth as a deeper pullback could signal weakness in the pattern.
- The pattern is confirmed when the price breaks out above the resistance formed by the high of the cup.
- A volume increase during the breakout is perceived as adding strength to the pattern.
Price Target
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Find the vertical distance between the bottom of the cup (lowest point) and the cup's resistance (highest point on either side of the cup).
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Add this distance to the breakout point (the point where the price breaks out above the cup's resistance).
Price Target = Breakout Point + (Resistance - Cup Bottom)
Head and Shoulders
A bearish reversal pattern that typically signals the end of an uptrend and the potential for a downtrend. It consists of three peaks: a middle peak (head) flanked by two smaller peaks (shoulders), with a support level (neckline) connecting the lows.
Key Characteristics
- The middle peak (head) is higher than the two outside peaks (shoulders).
- The neckline is a trendline drawn by connecting the lows of the left shoulder and right shoulder.
The neckline can be horizontal, ascending, or descending, but a descending neckline adds strength to the bearish signal. -
The pattern is confirmed when the price breaks below the neckline. A breakout should be accompanied by increased volume, signaling strong selling pressure.
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Volume typically decreases during the formation of the head and shoulders, but there is often a surge in volume during the breakdown below the neckline.
Price Target
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Calculate the vertical distance between the head (the highest point) and the neckline.
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Subtract this vertical distance from the breakdown point (where the price breaks below the neckline).
Price Target = Breakout Point - (Head - Neckline)
Inverse Head and Shoulders
A bullish reversal pattern that signals the potential for an uptrend following a downtrend. It mirrors the regular Head and Shoulders top pattern but forms at the bottom of a downtrend.
Key Characteristics
- The middle peak (head) is lower than the two outside peaks (shoulders).
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The neckline is a trendline drawn by connecting the highs of the left shoulder and right shoulder.
The neckline can be horizontal, ascending, or descending, but an ascending neckline adds strength to the bullish signal. -
The pattern is confirmed when the price breaks above the neckline. A breakout should be accompanied by increased volume, signaling strong buying pressure.
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Volume typically decreases during the formation of the head and shoulders, but there is often a surge in volume during the breakout above the neckline.
Price Target
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Calculate the vertical distance between the head (lowest point) and the neckline.
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Add this vertical distance to the breakout point (where the price breaks above the neckline).
Price Target = Breakout Point + (Neckline - Head)
Double Top
A bearish reversal pattern that forms after an uptrend and signals a potential reversal to the downside. It consists of two peaks (tops) at roughly the same price level, with a trough (low) between them.
Key Characteristics
- The peaks must be approximately equal in height with a trough (low) between them.
- The trough between the two peaks acts as a support level (known as the neckline). This is the lowest point reached after the first peak.
- The pattern is confirmed when the price breaks below the neckline.
- Volume typically decreases as the price forms the second peak and increases when the price breaks below the neckline.
Price Target
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Calculate the vertical distance between the peaks (the highest point) and the neckline (the trough).
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Subtract this vertical distance from the breakdown point (where the price breaks below the neckline).
Price Target = Breakout Point - (Peak - Neckline)
Double Bottom
A bullish reversal pattern that forms after a downtrend and signals a potential reversal to the upside. It consists of two troughs (bottoms) at roughly the same price level, with a peak (high) between them.
Key Characteristics
- The troughs must be approximately equal in depth with a peak (high) between them.
- The peak between the two troughs acts as a resistance level (known as the neckline). This is the highest point reached after the first trough.
- The pattern is confirmed when the price breaks above the neckline.
- Volume typically decreases as the price forms the second trough and increases when the price breaks above the neckline.
Price Target
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Calculate the vertical distance between the troughs (the lowest point) and the neckline (the peak).
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Add this vertical distance from the breakout point (where the price breaks above the neckline).
Price Target = Breakout Point + (Neckline - Trough)
Triple Top
A bearish reversal pattern that forms after an uptrend and signals a potential reversal to the downside. It consists of three peaks (tops) at roughly the same price level with two troughs (lows) between them.
Key Characteristics
- The peaks must be approximately equal in height with two troughs (lows) between them.
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The neckline is a support line drawn by connecting the lows between the peaks.
The neckline can be horizontal or sloped, but a horizontal neckline is more typical. -
The pattern is confirmed when the price breaks below the neckline. This indicates a reversal of the uptrend and the potential start of a downtrend.
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Volume generally decreases as the pattern forms the peaks and often increases during the breakdown below the neckline.
Price Target
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Calculate the vertical distance between the peaks (the highest point) and the neckline (the lowest point between the peaks).
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Subtract this vertical distance from the breakdown point (where the price breaks below the neckline).
Price Target = Breakout Point - (Peak - Neckline)
Triple Bottom
A bullish reversal pattern that forms after a downtrend and signals a potential reversal to the upside. It consists of three troughs (lows) at roughly the same price level with two peaks (highs) between them.
Key Characteristics
- The troughs must be approximately equal in depth with two peaks (highs) between them.
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The neckline is a resistance line drawn by connecting the highs between the troughs.
The neckline can be horizontal or sloped, but a horizontal neckline is more typical. -
The pattern is confirmed when the price breaks above the neckline. This indicates a reversal of the downtrend and the potential start of an uptrend.
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Volume generally decreases as the pattern forms the troughs and often increases during the breakout above the neckline.
Price Target
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Calculate the vertical distance between the neckline (the highest point between the troughs) and the troughs (the lowest point).
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Add this vertical distance to the breakout point (where the price breaks above the neckline).
Price Target = Breakout Point + (Neckline - Trough)
Rounded Top
A bearish reversal pattern that forms at the peak of an uptrend, indicating a gradual shift from bullish to bearish sentiment. It resembles a rounded, bowl-like shape and signals the potential for a long-term downtrend.
Key Characteristics
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The pattern forms a rounded, bowl-like shape with a smooth curve, rather than sharp peaks and troughs. It starts with a gradual rise, followed by a plateau, and then a gradual decline.
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The initial part of the pattern involves a slow and steady rise in price, creating the left side of the bowl. After reaching the top, the price flattens out and starts to decline, creating the right side of the bowl. The overall shape is rounded, not pointed, indicating a slow transition from buying to selling pressure.
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The pattern is confirmed when the price breaks below the support level established at the base of the rounding top. The support level is typically the lowest point during the consolidation phase at the bottom of the rounded shape.
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Volume generally decreases as the pattern forms and may increase during the breakdown, confirming the pattern and indicating strong selling pressure.
Price Target
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Calculate the vertical distance between the highest point of the pattern (the rounded top) and the lowest point (the support level).
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Subtract this vertical distance from the breakdown point (where the price breaks below the support level).
Price Target = Breakout Point - (Rounded Top - Support Level)
Rounded Bottom
A bullish reversal pattern that forms at the trough of an downtrend, indicating a gradual shift from bearish to bullish sentiment. It resembles a rounded, bowl-like shape and signals the potential for a long-term uptrend.
Key Characteristics
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The pattern forms a rounded, bowl-like shape with a smooth curve, rather than sharp peaks and troughs. It starts with a gradual decline, flattens out, and then gradually rises.
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The initial part of the pattern involves a steady decline in price, creating the left side of the bowl. The price then flattens out, forming a rounded base, and begins to rise, creating the right side of the bowl. The overall shape is rounded, indicating a slow transition from selling to buying pressure.
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The pattern is confirmed when the price breaks above the resistance level established at the top of the rounded bottom. The resistance level is typically the highest point during the consolidation phase at the top of the rounded shape.
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Volume generally decreases as the pattern forms and may increase during the breakout, confirming the pattern and indicating strong buying interest.
Price Target
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Calculate the vertical distance between the highest point of the pattern (the resistance level) and the lowest point (the rounded bottom).
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Add this vertical distance to the breakout point (where the price breaks above the resistance level).
Price Target = Breakout Point + (Resistance Level - Rounded Bottom)
Rising Wedge
The Rising Wedge pattern is a bearish reversal pattern that typically forms during an uptrend and signals a potential shift to a downtrend. It is characterized by converging trendlines that slope upwards, with the price making higher highs and higher lows.
Key Characteristics
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The pattern forms during an uptrend, with the price making a series of higher highs and higher lows. The upward-sloping trendlines converge as the pattern progresses, narrowing the price range.
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The pattern is confirmed when the price breaks below the lower trendline. This breakdown indicates a reversal and a potential start of a downtrend.
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Volume often decreases as the pattern progresses and can increase significantly during the breakdown, confirming the bearish reversal.
Price Target
- Measure the height of the wedge (the distance between the highest and lowest points at the start of the pattern).
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Subtract this distance from the breakdown point (where the price breaks below the lower trendline).
Price Target = Breakout Point - (Height of Wedge)
Falling Wedge
The Falling Wedge pattern is a bullish reversal pattern that typically forms during a downtrend and signals a potential shift to an uptrend. It is characterized by converging trendlines that slope downwards, with the price making lower lows and lower highs.
Key Characteristics
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The pattern forms during a downtrend, with the price making a series of lower lows and lower highs. The downward-sloping trendlines converge as the pattern progresses, narrowing the price range.
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The pattern is confirmed when the price breaks above the upper trendline. This breakout indicates a reversal and a potential start of an uptrend.
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Volume often decreases as the pattern progresses and can increase significantly during the breakout, confirming the bullish reversal.
Price Target
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Measure the height of the wedge (the distance between the highest and lowest points at the start of the pattern).
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Add this distance to the breakout point (where the price breaks above the upper trendline).
Price Target = Breakout Point + (Height of Wedge)