Chart Patterns - Head and Shoulders, Double Top, Triangle

What are Chart Patterns

Chart patterns are specific shapes that price movements repeatedly create. Through decades of market observation, investors have compiled how price is likely to move after certain patterns appear.

Chart patterns broadly fall into two categories:

What's important when recognizing patterns is in what trend they appeared. A pattern appearing at the end of an uptrend has completely different meaning from one appearing at the end of a downtrend.

Reversal Patterns

Head and Shoulders

Head and Shoulders is one of the most reliable reversal patterns. It appears at the end of an uptrend and consists of three peaks.

• Left Shoulder: First peak forms, then pulls back
• Head: Forms a higher peak than the left shoulder, then pulls back
• Right Shoulder: Forms a lower peak than the head (similar height to left shoulder)
• Neckline: A line connecting the two pullback lows

For the pattern to complete, price must break below the neckline after the right shoulder. If volume increases on the neckline break, signal reliability increases.

Price Target = Neckline - (Head High - Neckline) That is, price may fall below the neckline by the distance from the head to the neckline.

Inverse Head and Shoulders

An inverted form of head and shoulders that signals an upside reversal at the end of a downtrend. It consists of three lows, with the middle low (head) being the deepest. The pattern completes when the neckline is broken upward.

Double Top

A double top forms two similar highs before declining. It resembles the letter "M."

• Price forms the first high and pulls back
• Rises again to a similar level as the first high but fails to break through
• Pattern completes when the low between the two highs (support) is broken downward

Price Target = Support - (High - Support)

The two highs don't need to be at exactly the same price. Generally, a difference within 1-3% is acceptable. When the second high is slightly lower than the first, it's interpreted as a more bearish signal.

Double Bottom

An inverted form of double top, resembling the letter "W." It's a bullish reversal pattern where price forms two similar lows then rises.

• Price forms the first low and bounces
• Falls again to a similar level as the first low but doesn't decline further
• Pattern completes when the high between the two lows (resistance) is broken upward

Triple Top and Triple Bottom

Extended forms of double top/bottom, forming three similar highs or lows. They appear less frequently, but when they do, it means that price level is very strong resistance/support, so the reversal signal has high reliability.

Continuation Patterns

Triangle

A triangle is a pattern where price moves in an increasingly narrow range before breaking out in one direction. There are three types:

Important points about triangles:

• Breakout should occur before 2/3 of the triangle forms for higher reliability. Pattern strength weakens if it reaches the apex.
• Volume increase on breakout must be confirmed. Breakouts without volume may be false signals.
• Price Target: The widest part (height) of the triangle projected from the breakout point

Flag

A flag is a pattern that briefly consolidates in the opposite direction of the existing trend after a sharp price move (flagpole). The consolidation occurs between two parallel trendlines, looking like a flag on a flagpole.

• Bull Flag: After a surge, consolidation in a downward parallel channel, then upward breakout
• Bear Flag: After a plunge, consolidation in an upward parallel channel, then downward breakout

The price target for a flag is calculated by projecting the flagpole length from the breakout point.

Pennant

A pennant is similar to a flag, but the consolidation takes the form of a small symmetrical triangle rather than a parallel channel. After a sharp price move, volume decreases as price converges into a triangle, then breaks out in the direction of the existing trend.

Wedge

A wedge is a pattern where two trendlines slope in the same direction while converging.

• Rising Wedge: Both trendlines point upward but converge. Generally a bearish pattern, signaling downward breakout
• Falling Wedge: Both trendlines point downward but converge. Generally a bullish pattern, signaling upward breakout

Wedges are easily confused with triangles, but the key difference is whether both trendlines slope in the same direction or not.

Price Target Calculation Principles

For most chart patterns, price targets are calculated by projecting the pattern's height from the breakout point.

Remember that price targets are not "guaranteed prices" but price levels with higher probability. Price may reverse before reaching the target, or move beyond the target.

The Importance of Volume Confirmation

In chart patterns, volume is a key factor that significantly increases pattern reliability.

• Volume spike on breakout: The most important condition confirming pattern validity. Using OBV to confirm volume flow increases accuracy.
• Volume decrease during pattern formation: In triangles or wedges, it's normal for volume to decrease during the convergence process, indicating energy accumulation.
• Breakout without volume: Likely a False Breakout, requiring caution.

Factors Affecting Pattern Reliability

Patterns appearing on higher timeframes have higher reliability because more market participants recognize and react to the same pattern.

Chart Patterns in Cryptocurrency Markets

There are considerations when using chart patterns in cryptocurrency markets.

First, due to cryptocurrency's high volatility, patterns tend to form and complete quickly. Patterns that might take months to form in stock markets can complete in days in cryptocurrency.

Second, fakeouts are frequent. Especially in low-liquidity altcoins, deliberate price manipulation can cause false breakouts, so a strategy of re-entering after breakout confirmation is safer.

Third, rather than making trading decisions based on chart patterns alone, it's important to receive confirmation signals by using technical indicators like RSI or MACD, as well as tools like Fibonacci retracement.

Fourth, always have a stop-loss plan prepared for pattern failure. Using ATR to set reasonable stop-loss widths enables risk management appropriate for volatility.

Summary

Chart patterns are footprints of repeating human psychology in price movements. Reversal patterns signal trend changes, continuation patterns signal trend resumption, and price targets can be calculated by projecting pattern heights. However, no pattern guarantees 100% probability, so volume confirmation and risk management are essential.

Next article: Fibonacci Retracement - Key Ratios for Pullbacks and Extensions