There are two type of chart patterns:
1) Inversion patterns
These patterns tend to lead to an inversion of the current trend.
a) Head & Shoulders
b) Double top (bottom)
c) Triple top (bottom)
d) V (spike) formation
2) Continuation patterns
a) These patterns generally represent a pause in the trend, which continues thereafter
Head and Shoulders
A – the market is bullish and has just formed a new high (left shoulder)
B – market correction with lower volumes
C – new high (head) with volumes lower than those of point A
E – the market starts to decline
F – the market re-bounds (right shoulder) with lower volumes but does not reach point C
G – neckline is broken
H – market declines again with higher volumes
I – market tries to re-bound back above the neck line, but fails
L – market continues to decline with higher volumes.
In order to calculate the target price of a Head & Shoulders, we need to calculate the distance between the head ( C) and the neckline (D) and subtract the price at point G. This would be the minimum price target.
Double Top (bottom)
A – the market is in an uptrend and a new high is reached
B – market corrects
D – the market re-bounds to a similar level as point A but with lower volumes
E – market declines and breaks through the bottom part of the channel
F - market continues to fall with higher volumes
G – market tries to recover with lower volumes but finds resistance at the bottom part of the channel
H – a new low with higher volumes
In order to calculate the target price of a double top, we need to calculate the distance between point C and point B and subtract that from the price at point E. This would be the minimum price target.
Triple Top (bottom)
This is a pattern which is similar to head and shoulders with the only different that all three highs are found on the same price level. Volume tends to decline at each high and increases again at point G when the price crosses through the channel.
In order to calculate the target price of a triple top, we need to calculate the distance between point C and point B and subtract that from the price at point G. This would be the minimum price target.
For all triangle patterns, volume decreases when the triangle is forming and increases at the point when the trend line is broken. Furthermore, in order to calculate the target price, one needs to calculate the distance of the triangle’s base and apply it on the point where the price has just broken the pattern.
This pattern is formed with two trend lines – one which is ascending and one that is descending.
The bullish symmetrical triangle:
The bearish symmetrical triangle:
This pattern is formed by a flat upper line and an ascending bottom line. The trend continues in a bullish direction.
This pattern is formed by a flat bottom line and a descending upper line. The trend continues in a bearish triangle.
This is similar to the symmetrical triangle however the two trend lines are either downward moving or upward moving. Furthermore, the inclination of the wedge is opposing to the new trend that will be formed.
Falling wedge (bullish trend):
Rising wedge (bearish trend)
The Flag patterns are preceded by a strong movement, almost vertical, with high volumes. The volumes decline during the formation of the flag and increase when the pattern breaks.
The rectangles define a lateral movement of the market, characterized by high volumes on the highs in the case of a bullish rectangle and by high volumes on the lows in the case of a bearish rectangle.