Module 4: Chart Patterns

Chart patterns are geometric formations created by price movement over multiple candles. They represent the psychological battle between buyers and sellers and often precede significant price moves.[^1]

Reversal Patterns

Head and Shoulders: Three peaks where the middle peak (head) is higher than the two outer peaks (shoulders). The "neckline" connects the lows between the peaks. A break below the neckline signals a bearish reversal. Target = distance from head to neckline, projected downward from the breakout point.[^1]

Inverse Head and Shoulders: The bullish mirror image. Three troughs where the middle trough is the deepest. A break above the neckline signals a bullish reversal.[^1]

Double Top: Two roughly equal peaks at a resistance level, separated by a pullback. The "trigger line" is the low between the peaks. A break below triggers a bearish move. Target = distance from peaks to trigger line, projected downward.[^1]

Double Bottom: Two roughly equal troughs at a support level. A break above the intermediate high between them triggers a bullish move.[^1]

Continuation Patterns

Bull Flag: After a strong upward move (the "flagpole"), price consolidates in a slight downward-sloping channel (the "flag"). A breakout above the flag continues the uptrend. Target = length of the flagpole projected from the breakout.[^1]

Bear Flag: The inverse—a strong downward move followed by a slight upward-sloping consolidation. Breakout below continues the downtrend.

Ascending Triangle: Price makes higher lows while hitting a flat resistance level. This compression indicates increasing buying pressure. Breakout above resistance is the signal.[^1]

Descending Triangle: Price makes lower highs while holding a flat support level. Increasing selling pressure leads to a breakdown below support.[^1]

Symmetrical Triangle: Converging trendlines with lower highs and higher lows. Price can break either direction. Wait for a confirmed breakout before entering.[^1]

Pennant: A small symmetrical triangle that forms after a sharp move. Typically a continuation pattern that resolves in the direction of the prior move.[^1]

How to Trade Chart Patterns

1. Identify the pattern as it forms—don't enter before it completes.
2. Wait for the breakout—price must close beyond the pattern boundary (neckline, trendline, etc.).
3. Wait for the retest (optional but higher probability)—price often returns to retest the breakout level before continuing.[^7]
4. Set your target based on the measured move (pattern height projected from breakout).
5. Set your stop-loss beyond the pattern boundary on the opposite side.

Use timeframes M5 to H1 for intraday chart patterns. Always confirm with volume—valid breakouts should come with increased volume.[^1]