101 Concepts for the Level I Exam

Concept 16: Common Chart Patterns

Reversal Patterns signal the end of a trend. The four kinds of reversal patterns are:

Head and shoulders pattern:

Consists of the left shoulder, the head, and the right shoulder.
Indicates the end of an uptrend.
You can profit by going short on the security, the price target is:

Price target = neckline – (head – neckline)

Inverse head and shoulders pattern:

Is a mirror image of the head and shoulders pattern.
Indicates the end of a downtrend.
You can profit by going long on the security, the price target is:

Price target = neckline + (head – neckline)

Double tops and bottoms:

A double top is formed when prices hit the same resistance level twice and fall down. It indicates the end of an uptrend.
A double bottom is formed when prices bounce back from the same support level twice. It indicates the end of a down-trend.

Triple tops and bottoms:

Triple tops are formed when prices hit the same resistance level thrice.
Triple bottoms are formed when prices bounce back from the same support level thrice.

Continuation patterns signal a temporary pause in the trend, and that the trend will continue in the same direction as before. The four kinds of continuation patterns are:

Triangles:

There are three forms – symmetrical triangles, ascending triangles and descending triangles.
One trendline connects the highs and a second trendline connects the lows.
As the distance between the highs and lows narrows, the trendlines converge, forming a triangle.

Rectangles:

One trendline connects the highs and a second trendline connects the lows.
As the distance between the highs and lows is constant, the trendlines are parallel to each other and form a rectangle.

Flags:

Is similar to a rectangle and is formed by two parallel trendlines.
However, it forms over a much shorter time interval.

Pennants:

Is similar to a triangle and is formed by two converging trend lines.
However, it forms over a much shorter time interval.