Chart patterns
Triangles, flags, head and shoulders and more, and our tools that find them
12 questions about Chart patterns
Chart patterns: what they are and how to trade themA chart pattern is a shape price makes as buyers and sellers fight. The useful ones end in a breakout: a candle that closes outside the shape, which is the signal traders act on.
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What is a breakout, and why wait for the close?A breakout is a candle that closes outside a pattern's line. Waiting for the close, not just a wick through, filters out most of the fake moves that snap straight back.
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Where do I put my stop and target on a pattern?The stop goes on the other side of the pattern, where the idea is wrong. The target is usually the pattern's height measured from the breakout. Then check that the reward is worth the risk.
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Triangle patterns: symmetrical, ascending and descendingA triangle is price squeezing between two trendlines. Symmetrical: both lines close in. Ascending: a flat ceiling with rising lows. Descending: a flat floor with falling highs. The close through a line is the breakout.
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Rising and falling wedgesA wedge is two lines that both slope the same way and narrow. A falling wedge (both lines down) often breaks up as the selling runs out; a rising wedge (both lines up) often breaks down as the buying fades.
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Bull flags, bear flags and pennantsA flag is a short pause after a sharp move: a small channel tilted against the move (a flag) or a small triangle (a pennant). The breakout in the direction of the first move is the signal.
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Head and shoulders, and the inverse head and shouldersHead and shoulders is a reversal pattern: three highs, the middle one highest, with a neckline under the two dips. A close below the neckline ends the uptrend. The inverse (three lows) does the opposite.
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Double top and double bottomA double top is two highs at about the same price with a dip between; a close below the dip's low turns it down. A double bottom is two lows with a bounce between; a close above the bounce's high turns it up.
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Cup and handleA cup and handle is a rounded dip and recovery (the cup) followed by a short, shallow pullback (the handle). A close above the handle's high is the breakout.
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Rectangle (a trading range)A rectangle is price bouncing between a flat ceiling and a flat floor. A close outside either side is the breakout, and the range's height is the classic target.
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The Hot Dog patternThree candles: a red one, a big green one with the highest high (the "hot dog"), and a red one, like a hot dog in its bun. The first close above the middle candle's high is the buy.
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Support and resistanceSupport is a price where buying has stopped falls before; resistance is where selling has stopped rises. The more often price turns at a level, the more traders watch it.
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