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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.