Chart Patterns

Cup and handle pattern

A cup and handle pattern can be either a continuation or a reversal pattern depending on the previous trend.

It looks like this:

A cup and handle pattern in an uptrend (as indicated above) is a bullish continuation pattern. Aside from a small blip (the cup), the upward trend will prevail. Some cups are U-shaped, while others are V-shaped. In ideal conditions, the cup has equal highs on either side before consolidating at a specific price point (the handle). The estimated price target for the next breakout after the consolidation is symmetrical to the height of the cup.

Of course, cup with handle patterns can indicate different things in a prevailing downtrend. In this case, the same cup with handle pattern signifies the end of a downtrend and a breakout into an uptrend.

If the price declines more than half the cup’s height, then selling momentum is too significant and it’s no longer considered a cup and handle pattern (the ‘handle’ broke).

The longer it takes for the cup and handle pattern to form, and the deeper the cup formation, the greater the momentum behind the breakout and the higher the price target. When you add the height of the cup to the breakout point, it provides a good indication of the short-term price target.

Flags and Pennants

Flags and pennant patterns are continuation patterns. They’re formed when prices consolidated for a brief period before the market resumes moving in the same direction. You can also have both bearish and bullish flags.

The difference between a flag and a pennant pattern is the shape. A flag is a rectangular shape, while a pennant is a triangular shape:

Flag and pennant patterns are typically preceded by a sharp rally or decline. This rally or decline forms the ‘pole’ of the flag. The distance from the support or resistance level to the ‘flag’ or ‘pennant’ is called the flag pole.

You can analyze a price target from a flag or pennant chart by adding the length of the flag pole to the top of the formation in an uptrend and from the bottom of the formation in a downtrend.

Wedges

There are two types of wedge patterns, including rising wedge patterns and falling wedge patterns. These patterns can be continuation or reversal patterns depending on what markets were doing before the pattern formed.

In an uptrend, a rising wedge pattern indicates a bearish reversal. Markets are turning and prices are starting to drop. In a downtrend, a rising wedge pattern is seen as a continuation as prices continue to drop.

The falling wedge, meanwhile, is considered a bullish pattern. The falling wedge indicates a bullish reversal when formed in a prevailing downtrend, for example. When formed in a prevailing uptrend, the falling wedge indicates a continuation as prices continue to rise.

Head and Shoulders

Head and shoulders (HS or H&S) patterns are some of the most reliable reversal patterns.

Some HS patterns are considered head and shoulders top patterns or ‘HS tops’. It’s a bearish reversal pattern that includes three parts, including two smaller peaks beside a taller peak:

By connecting the low of the left shoulder with the low of the head, we can create the ‘neckline’ of the chart. Once prices fall below the neckline, the upward trend breaks down, and markets enter a bearish trend, as seen in the chart below with the pullback and target line.

For HS top charts you can calculate a price target by adding the height of the head to the breakout point.

Head and shoulders bottom charts, meanwhile, are also known as HS bottoms or inverse HS charts. It’s a bullish reversal pattern (instead of a bearish reversal pattern) where the prevailing trend is downward.

Just like the HS top chart, the HS bottom chart consists of three parts, including two shallower valleys or higher lows on either side of a deeper valley or lower low.

As per HS top, also for bottom charts you can calculate a price target by adding the height of the head to the breakout point.

Double Top

Double tops are bearish reversal patterns in a prevailing uptrend. With a double top chart, you’ll see a brief pullback followed by an abortive rally, then a second pullback at the previous high, which then results in the price breaking down below the earlier low.

It’s easy to be lured into a double top pattern. Ideally, you’ll wait until the price drops below the first pullback low after retesting the top because this is when the formation is complete, and it’s the low point in the chart.

To calculate the price target of a double top pattern, you can add the height of the formation from the point where support breaks.

Double Bottom

A double bottom chart formation is what happens if you flip a double top formation upside down. The double bottom formation is a bullish reversal pattern in a prevailing downtrend. After hitting the bottom once, rising once, and hitting the bottom again, the double bottom occurs when prices break through the neckline to complete the ‘W’ formation.

Prices may rally to a recent high following a downtrend, then fall again to the level of the previous low, before rallying a final time to break out above the previous recent high to complete the formation and reverse into an uptrend. To calculate price targets for double top highs, you can add the height of the formation to the breakout point.

Triple Top & Triple Bottom

Making the above formations even more complicated is that we can sometimes have triple top and triple bottom formations that look similar to double top and double bottom formations. Like double top/bottom formations, triple top/bottom formations are also reversal patterns. They go against a prevailing uptrend or downtrend.

As you can see here, the triple top formation consists of three equal peaks split by two valleys.

The triple bottom formation, meanwhile, is flipped upside down, consisting of three identical valleys and two abortive peaks.

To calculate the price target for a triple top or bottom formation, you add or subtract the height of the formation to or from the breaking point, similar to how you calculate price targets in double top/bottom formations.

Triangle Patterns

Triangle patterns consist of three different formations:
 ascending triangles, descending triangles and symmetrical triangles,

Ascending triangles are typically bullish continuation patterns in a prevailing uptrend. However, ascending triangles can also form as a reversal pattern in a downtrend. An ascending triangle pattern consists of two or more roughly equal heights and increasing lows. The resistance line is horizontal, although the extended support line slopes upward and convers with the resistance line, which is how the triangle is formed.

For an ascending triangle to form, each swing or low must be higher than the previous low. The formation is typically considered to be complete when the price breaks out past the upper resistance line.

To calculate the price target in an ascending triangle, you can add the height of the triangle’s basis to the breakout point. The stop loss should be placed at the most recent swing low.

The descending triangle is the opposite of the ascending triangle. Typically, it’s a bearish continuation pattern formed as prices continue to gradually drop over time as part of a broader downtrend. However, it can also form a reversal pattern during an uptrend. As with an ascending triangle, the price can occasionally break out upwards, which is why it’s important to play the pattern as it develops and use tight stops.

The descending triangle is formed as equal lows create a horizontal support line while decreasing highs create a downward sloping resistance line, creating the same type of right-angle triangle seen in the ascending triangle above.

To calculate the price target in a descending triangle formation, you subtract the height of the base of the triangle to the point where support breaks down.

symmetrical triangle, as you might have guessed, forms somewhere in between an ascending and descending triangle pattern. It’s a typical bilateral pattern where it’s difficult to determine the outcome of the pattern until a clear breakout has been confirmed.

With a symmetrical triangle, we’ll see a series of lower reaction highs and higher reaction lows, with the price eventually consolidating at a point. This point forms the tip of the triangle. The support and resistance lines, meanwhile, form the two sides of the triangle, eventually meeting at the point.

Since the breakout direction is difficult to determine, some traders will play both sides in a symmetrical triangle pattern, placing a long and short order, then closing one when the other hits.

To calculate the price target in a symmetrical triangle, add or subtract the base of the triangle to the breakout point. You can calculate a long-term price estate by drawing an extended trend line parallel to the support line (assuming the pattern breaks upward) or parallel to the resistance line (if the pattern breaks downward) passing through the other vertex of the triangle’s base.

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