CHART

PATTERNS
HANDBOOK
CHART PATTERNS HANDBOOK

CONTENTS
Introduction 3
CHAPTER - 1 5
Types of Charts 5
1.1 : Line Charts: 6
1.2 : Bar Charts: 7
1.3 : Candlestick Chart: 7
CHAPTER - 2 9
Trends 9
2.1 : Market Trend and Range-Bound Consolidation: 10
2.2 : Trendline & Channels: 12
2.3 Role Reversal: 14
2.4 : Channels 14
CHAPTER - 3 16
Volume 16
CHAPTER- 4 19
Classical Chart patterns 19
4.1 : Head and Shoulder & Inverse Head & Shoulder: 20
4.2 Double Tops and Bottoms: 21
4.3 : Triple Tops and Bottoms: 22
4.4 Triangles: 23
4.5 : Flag and Pennant: 24
4.6 Wedge: 25
CHAPTER – 5 26
Candlestick Reversal Patterns 26
5.1 : Hammer: 27
5.2 : Shooting Star: 28
5.3 : Inverted-Hammer: 30
5.4 : Hanging Man: 30
5.5 : Bullish Engulfing Pattern: 31
5.6 : Bearish Engulfing Pattern: 32

P a: gPiercing
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5.8 : Dark Cloud Cover: 33

5.9: Doji: 33
CHAPTER - 6 35
Indicators 35
6.1: Simple Moving Average: 36
6.2: RSI: 37
6.2.1 : Calculation: 38
6.2.2 : Usage: 38
6.3: ADX: 38
Conclusion 40
About Us 42
Elearnmarkets 43

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Introduction

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Introduction:
Market analysis is divided into two primary categories, fundamental analysis, and technical
analysis. In the method of fundamental analysis, in order to attain a fair value for an organization,
an analyst is required to examine the company’s financial statement, the business model of the
company, macroeconomic aspects, capabilities of the management, and other various factors.
On contrary, technical analysis is a study of non-fundamental factors. An analyst studies the
stock’s price as a result of interaction between the supply and demand. Price is the primary
motive for a technical analyst. He or she looks only at volume and price-over-time and considers
them the supreme aspects of the market.

Price over time and volume are two main data points and the whole discipline of technical
analysis is based on them. These two primary data points are used to derive all the other concepts,
indicators, and patterns. It is a fascinating subject. Technical analysis is a probabilistic discipline instead
of definitive science. Simply, it is more of an art rather than a science. Popular chart patterns or
indicators are within the market. But nothing in this world continuously gives its 100 percent. Still, we
go with them because they are more likely to pass than they fail. So the first probability in this
handbook is the number of times the mechanism has passed among the number of times it has
failed. In different stocks and phases, the ratio is different. Because of this reason technical analysis
is known as art. By the means of experience, a chartist is capable to produce an opinion and gain
an edge through assessing the market over a bookish analyst. This handbook with the knowledge
of technical analysis can be your stepping stone towards your destiny of becoming an expert in
the field of technical analysis. We will be happy if you look and examine the concepts gradually
and study the given charts. Compare both the old charts with the live ones. Come up with a
prediction when you find an indicator or a pattern. After some time, compare your prediction
with the reality. Perform an analysis to find the reason of why it worked or not. Keep progressing up with
the e-book and make notes to check whether you improved or not. We wish you a very good luck
in this long journey.

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CHAPTER - 1

Types of Charts

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Chapter 1: Types of Charts

Price over time is represented in the form of two-dimensional charts. Various types of charts are available in
this field. The most commonly used charts are Candlestick charts, Bar charts, and Line charts. The time axis is
represented on the X-axis. Time can be represented in the form of seconds, minutes, hours, days, weeks, and
months. The chart becomes more detailed when you shorten the period of time. Disregarding the time-frame
observations, the same concepts are applicable on charts in the field of technical analysis. Still, the rate of
success changes according to the individual decisions that are based on indicators or patterns across different
time frames. In general, increasing the time frame of the chart increases the probability of any type of concept
in the market.

1.1 : Line Charts:

A dot is used to represent each price point in the line chart. Price is represented by the Y-axis and time scale is
represented using the X-axis. At the end of the time unit, the dot represents the closing price. Then all the
points are joined together to form a line shape. This is the most simplest form of a chart. It is worthy when we
want to do a comparison between three-to-four similarly priced stocks charts. In addition, a clear idea of price can
be concluded through line charts.

Figure 1.1: Line Chart

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1.2 : Bar Charts:

Series of bars are used to represent data in a bar chart. Four significant price points are inscribed in each bar. - open
close high and low. When the close is higher than the open, the bar is represented in blue or green color. When
close is lower than open, the bar is represented in red colour. Classical price patterns are demonstrated in a
good manner through bar charts and it is relatively more comprehensive than the line chart. A more detailed
discussion will be given on the classical chart pattern in relevant time.

Figure 1.2: Bar Chart

1.3 : Candlestick Chart:

Candlestick chart’s concept was originated from Japan. They are commonly referred to as Japanese
Candlestick charts due to this reason. This chart is mostly known for its flexibility and its all-around
performance in chart representation. A candle is used to represent the behavior of price throughout the time
unit. The candle is green if the stock’s closing is higher than the open price during a certain period of time.
The candle is red if the closing price is lower than the opening price. Every candle is composed of two wicks
and a body. The upper and lower wicks portray the highs and lows and the body portrays the distance
between open to close.

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Figure 1. 3(a): Candlestick Chart Diagrammatic Representation

A Candlestick chart adds clarity to the given information regarding the price action. Moreover, a pattern is
formed when two or three candlesticks are placed consecutively. This prediction can be used to extract the
conviction on the continuation of the current move or predict the reversal of a prior move. This type of
pattern is known as the Candlestick pattern. More discussion is due in course of time.

Figure: 1.3(b): Candlestick Chart Pattern Example

We will study the concept of “Trends” after getting introduced to the ideology of charting.

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CHAPTER - 2

Trends

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Chapter 2: Trends

2.1 : Market Trend and Range-Bound Consolidation:

It is often considered that market movement happens in the form of trends. A continuous or a directional
price movement is considered as a price trend and is in the upward or downward direction. They are also
known as upward and downward trends.

Looking through the price action in markets through charts, we will acknowledge that no price movements
happen in a straight line. Intermediate corrections may be represented as a secondary trend, and there
are the minor counter moves, which are defined as a minor trend among the secondary activities. They are
explained by considering the broader uptrend, which is represented as the primary move.

Figure: 2.1(a): Market Trends

Up-trend can also be represented in the form of a sequence comprising of the higher highs and higher
lows. As we look into the downtrend, they are represented as a sequence comprising lower lows and lower
highs. A broken series leads to a trend that is reverse.

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Figure: 2.1(b): Trend Reversal

Market trends are not always linear. There is the consolidation of the trends within a small range and goes
nowhere. Similarly, it can encounter a breakage leading to a sudden upside or downside.

Figure 2.1(c): Market Consolidation

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2.2 : Trendline & Channels:

Trend line and channels are considered one of the most straightforward and useful tools present in the
market. By joining the lowest points of the periodic-pulls backs, a trend line is formed. It takes place in
uptrends. The slope of the up-trend is positive. Two lows are joined to form a trend line during an up-move.
The bar is then extended in the upward direction, For the validation of the trend line. Buying near the tread
line and selling higher leads to making money in the up-trending market today. A more significant number of
trend line validation leads to more importance of it. The upward trend line characterizes the area of support.
This point is where the selling pressure meets the buying pressure.

Figure 2.2(a): Uptrend

An investor always looks out for the prices and maintains a stop-loss point below which they cut their
position. Breaking the trend line leads to the reversal of the market trend or continuing the uptrend with
little less force.

The market may go sideways, continue the uptrend with a little force or reverse the trend when the trend
line breaks.

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Figure 2.2(b): Uptrend Reversal

Similarly, looking at the downtrends, a trendline can be formed by the joining of pullbacks highs. The slope is
downwards. Same in case, the more number of times it is validated, the more critical it gains.

Figure: 2.2(c): Downtrend

Breaking up the down-trending line, leads to the trend continuing with a slower pace, or it's reversed or may
go sideways. This line is considered the area of resistance, and that is the point where the selling pressure
meets the buying pressure. In the trend, eventually, it leads to a decline in price.

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2.3 Role Reversal:

The breaking of the support or the resistance of a trendline leads to the role reversal. It encounters resistance
if the price falls below the support line. The rising of price above the resistance line leads to support. They also
undergo shifting in the supply and demand, causing the breached line to reverse its role.

Figure 2.3: Role Reversal

2.4 : Channels
The rhythmic movements in the uptrend, downtrend, or consolidation in the form of parallelograms
lead to channels' formation. Their boundaries are considered as good points for several trades and the
small stop losses.

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Figure 2.4: Channels

The range or trend of the stock breaks when the price is out of the channel.

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CHAPTER - 3

Volume

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Chapter 3: Volume:

An essential aspect of charting is volume. The number of quantity of stocks in association with the change hand
is considered as Traded volume. The graph shows that the volume is regarded as higher in any particular movie,
the greater the conviction. The conviction is more remarkable in that move to continue greater distance in that
direction. The stock is generally considered to lose momentum if the volume is lower side during a move.

When talking about the range-bound phases, the volume is typically Low.

Figure 3: Volume

In absolute terms, the traded volume has no significance and an important point to consider.

The higher or lower volumes are often discussed with the average volume over a certain period.

Trend Volume Interpretation

Up High Uptrend may go a greater distance

Up Low Lack of conviction/ participation in uptrend. Likely to

retrace.

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Down High Down move may cover greater distance

Down Low Less conviction in the down move, may reverse

Delivery % is a crucial point to consider in this aspect while talking about the traded volume. Intra-day
trading can be defined as the concept in which the person first buys shares and sell them by the end of the
day in the market. While the taking delivery of the claim is considered when the investor has a positive
view. Looking into that, he may buy that and take it forward for the next couple of days. There is a positive
conviction in the stock, if there is a rise in stock price with a high % delivery volume. Feeling negative
regarding the store may lead them to sell the stock. Cynical viewers are known as bears, and those having
positive views are bulls. The supply-demand of the stock determines the price of the security in a market.
Higher the supplier, the more the people looking to sell leads to the decline in price. This decline in price
with high delivery % is known as negative for the stock.

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CHAPTER- 4

Classical Chart
patterns

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Chapter 4: Classical Chart Patterns:

No trend usually lasts in a market, and it may either follow a trending phase or range-bound phase. A specific
during in the downtrend, the market often moves in the reverse direction. The reasonable indications in the
price reversals are formed in the charts according to the well defined geometrical patterns. It is considered as
the Reversal classical chart pattern. They are considered to be a part of accumulation when formed as a bullish
reversal pattern. They are considered part of the distribution. These patterns are included at the top of a price
move just before the bearish reversal.

However, it is considered that the geometrically shaped consolidation always doesn't. It has a link with price
reversal. They are known as the classical chart pattern.

4.1 : Head and Shoulder & Inverse Head & Shoulder:

The bearish reversal pattern has its association with the head and shoulder pattern. This trend usually occurs
after an uptrend. The pattern formation leads with the three consecutive tops with the middle one, which is
higher than the other two. The head is considered the Middle top. In this pattern, the shoulder is the two side
peaks. The joining of the intermediate toughs leads to the neckline. When talking about the target, the distance
between the neckline and head is the breakpoint's target project. The conviction phenomenon occurs here in
which the volume in the down leg of the right shoulder is on the higher side. The breaks usually happen with
the high volume.

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Figure 4.1: Head and Shoulder Pattern

The mirror image of the head and shoulder pattern, Is the inverse head and shoulder. It usually happens
after a sustained downward trend. Talking about the rules of stop loss and target are similar in this regard.
This pattern of the head shoulder is usually considered as the very effective bullish reversal pattern.

4.2 Double Tops and Bottoms:

These patterns are considered one of the most reliable ways and most commonly used patterns. The double
tops and bottom trends are formed after a sustained trend. These trends signal to the chartist and signal that
the trend is about to change or reverse. When the price movement test supports, or when the resistance levels
twice and is unable to break, it leads to creating these patterns. A benefit they offer is to intermediate the
signal and long term trend reversals.

Figure 4.2: Double Tops and Bottoms

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4.3 : Triple Tops and Bottoms:

Triple tops and bottom are considered as another set in the chart patterns and analysis. But they are not
prevalent as others, such as head and shoulders and double tops and bottoms. The mechanism of their action
is the same but. When the price movement tests a level of support or the resistance three times, they lead to
forming these art patterns. They are also unable to breakthrough. These patterns also signal a reversal of the
prior trend. At the break of the neckline, a trade entry is initiated.

Figure 4.3: Triple Tops and Bottoms

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4.4 Triangles:
They are considered as one of the most well-known and common chart patterns in technical analysis. The types
of triangles vary in construction and their implications and include asymmetrical triangles, ascending and
descending triangles. These triangles chart patterns have a longevity of several weeks to months. They are
considered as areas after the trending move. The triangle patterns are regarded as the continuation patterns.
They can also appear in the up-trend and downtrend and can act as reversal patterns.

Figure 4.4: Three Kinds of Triangle Patterns

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4.5 : Flag and Pennant:

When the sideways price movement follows the sharp price movement, it leads to these chart patterns. These
chart patterns are considered as the continuation patterns. The flag and pennant chart patterns last from one
to three weeks. They also experience a series of up-trends and downtrends.

Figure 4.5: Flags and Pennants

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4.6 Wedge:
This type of pattern exists as the continuation of the reversal pattern. They slant in the upward or downward
direction, making it different from the symmetrical triangle rest. This wedge patterns generally constitutes a
sideways movement. The customs form over a more extended period, such as three to six months. They make
the signals confuse because they are classified as a continuation as well as reversal patterns.

Figure4.6: Wedges

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CHAPTER – 5

Candlestick
Reversal
Patterns

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Chapter 5: Candlestick Reversal Patterns

These patterns provide the entry and stop-loss criteria.

5.1 : Hammer:
This pattern is considered as the single candlestick pattern and associated with the bullish reversal pattern.
The hammer pattern occurs after a prolonged downtrend. Bulls are supposed to overpower bears and push
the price higher in the case. Apart from that, the candle formed in this process should be viewed as a small
body, consisting of a big lower shadow and negligibly small upper shadow. It consists of different colors, either
red or green. If the body color is green, the hammer is thought to be a little bullish. In this case, the bulls were
strong enough to close the price higher than the open price. Eventually, in the next few days, there should be
a gap up the opening present. Or is it thought that the price should move above the high of the candle hammer
candle? This phenomenon is considered as the confirmation or the validation of the pattern. As if assurance is
greater, the more critical it holds, and without proof, it has no significance.

Figure 5.1(a): Hammer

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Figure 5.1(b): Hammer Example

5.2 : Shooting Star:

The mirror image of the hammer candle is considered as the shooting star. In this phenomenon, it Is thought
to have a sustained uptrend followed by a gap up opening. Regarding the bulls, they must be pushing the price
higher in the initial part of the day. In the later stages, it is considered for the bulls to take control of the stock.
They push the prices down. In this case, simultaneously, the close price should be close to the opening price.
This pattern results in a small green or red color body. Followed by a big upper shadow and a little lower
shadow. The upper shadow is considered to be twice the length of the body. If, within the 2-3 candles. The
price moves below the candle's low, and there comes the confirmation of the shooting pattern. It is considered
to take a short trade with stop loss above the candle's high in this case. If the body is red, it's regarded as
slightly bearish. As compared to the green body in this pattern.

The shooting candlestick pattern also acts as a bearish reversal pattern. It triggers a down move after an
uptrend.

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Figure 5.2(a): Shooting Star

Stop Loss

Confirmation

Figure 5.2(b) Shooting Star Example:

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5.3 : Inverted-Hammer:
This pattern is considered as the single candlestick bullish reversal pattern. The inverted hammer pattern
occurs after a sustained way of downtrend. In the beginning, it is thought to have a gap-down opening. The
bulls should be pushing the price lower during the day and close near the open price. In this case, the color of
the resulting candle is green or red, a small body. The upper wick, in this case, should be at least twice the body
of the candle. The lower shadow is considered to be remote or negligible in this case.

The green body in this pattern is considered as bullish than red. As the name suggests, it has an appearance of
an inverted hammer. The bears were not able to push the price below the opening price in this case, during
the day. And this pattern is overall bullish than the hammer pattern. Once the price moves above the high of
the candle, there comes the confirmation pattern. In this phase, the buy trade can be initiated, except with a
stop loss below the candle's low. It is thought to occur less frequently as compared to the hammer pattern.

Figure 5.3: Inverted Hammer

5.4 : Hanging Man:

This pattern is a single candlestick pattern. The hanging man pattern has a bearish reversal pattern. This pattern
happens after a sustained up-move. It occurs after the end of the uptrend; otherwise, it's similar to the
hammer. It consists of a small body of red or green color. The lower shadow is at least twice the length of the
body. The lower shadow is considered to be remote or negligible in this pattern. The red color pattern is
considered to be more bearish in this case as compared to the green design consisting body. When the price
moves below the low of the candle, there comes the confirmation pattern. In the hanging pattern at this point,
the trader may take a short trade in association with the stop loss above the high of the candle. This pattern of
the hanging man is considered as a bearish counterpart of the bullish inverted hammer. This pattern occurs
much less in frequency than a shooting star, which is regarded as another bearish reversal pattern.

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Figure 5.4: Hanging Man Pattern

5.5 : Bullish Engulfing Pattern:

This pattern is considered as the two candlesticks bullish reversal pattern. There is a downtrend in this pattern
at first. Then in this pattern, the red candle is followed by the green candle. The body of the green candle in
the engulfing design engulfs the body of the red candle. The previous day's closure, on the bearish note, leads
to the two and phenomenon. With the progression, the bulls take over the charge. They eventually succeed in
closing the previous day's high. The bearish engulfing pattern is considered to be confirmed if the two
candlesticks' highest point is breached on the upside, within the next 2-3 candles in the pattern. Initiation of
the buy trade starts with the confirmation with stop loss below the two candlestick patterns.

Figure 5.5: Bullish Engulfing Pattern

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5.6 : Bearish Engulfing Pattern:

This pattern is considered the mirror image of the bullish engulfing pattern with the bearish pattern's
implication. This pattern constitutes the uptrend first, followed by the green candle as a continuity process.
On the next day, there's a gap up above the close of the closure day. There is a closure with the red body
totally engulfing the first candle's body in this pattern. The trader takes the short trade with a stop loss above
the top of the two candlestick pattern in the case of a confirmation. It is thought that if the second candle is
large, the more bearish the pattern is.

Figure 5.6: Bearish Engulfing Pattern

5.7 : Piercing Pattern:

The 2nd candle in this pattern does not close the engulfing of the body of the first pattern. Otherwise is similar
to the bullish engulfing pattern. In this case, it closes the crossing the halfway mark of the body of the first
candle. Within the 2-3 candles. When price Crosse the high of the two candlestick patterns, there comes the
confirmation in this pattern.

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Figure 5.7: Piercing Pattern

5.8 : Dark Cloud Cover:

This pattern is considered a two candle stick bearish reversal pattern similar to the bearish engulfing pattern.
In this dark cloud cover, the second candle fails to engulf the first candle. A short trade is thought to be taken
with stop loss above the candle's high to confirm this pattern.

Figure 5.8: Dark Cloud Cover

5.9 : Doji:
The pattern is considered to be a single candlestick pattern. It follows a trending move, whether it's uptrend
or downtrend, and assume to be necessary. This pattern symbolizes the decision, followed by the Doji pattern,
and the incumbent trend is thought to go reverse. Besides, it may go sideways or continue the uptrend.

This Doji pattern also symbolizes caution. In case of probability to be high, the erstwhile trend may be ending.

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It has an opening and closing at a similar pattern. It also constitutes the upper shadows and lower shadows of
various proportions.

Figure 5.9: Doji

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CHAPTER - 6

Indicators

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Chapter 6: Indicators
In the market, indicators act as a tool to help in making decisions. Indicators are of many types the is used to
calculate and indicate volatility, momentum, trends, and for other purposes in the market. Price and volume
with respect to the time are used to derive many indicators. Here we describe 4 indicators that are efficient.

6.1 : Simple Moving Average:

Simple Moving Average abbreviated as SMA can be measured by adding the closing price of security prices
for the last n-periods and dividing it by the total number of time periods.

For example, suppose we want to calculate the 9 periods SMA of a security price.

First, we will add the last 9 Days Closing Price of the security, and then it will be divided by the 9 periods.
The calculation for 9 periods SMA:

(P9+P8+P7+P6…. +P1)/9

Where P=Price

P9= Closing Price 9 days ago

SMA act as a technical indicator that is directly placed on the security price and is indicated by the line. The
periods vary in SMA indicators depending on the selection of trader.

There are 3 terms. Short, medium, and long. 5,8,13 etc is used for the shorter term. 20,34,50 is used for
medium-term and 100,200 terms are used for a longer term.

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The term is considered to be positive if a medium-term moving average has a positive slope and vice versa.

Price breaching a particular moving average from down to up is considered a bullish sign. Similarly, price
breaching a particular moving average from upside and closing below is considered bearish.

A bullish sign is considered when a Price breaching a particular moving average from down to up. Similarly, a
bearish sign is considered when the price breaching a particular moving average from upside and closing.
Bullish crossover can be seen when a shorter-term moving average crossing a medium-term moving average
from below. Bearish crossover is when a shorter-term moving average crosses a medium-term moving
average from upside to below and it is an indicator for bearishness.

Figure 6.1: Simple Moving Average

6.2 : RSI:
J. Welles Wilder, developed a momentum oscillator named Relative Strength Index (RSI). It is responsible
for calculating the speed and velocity of the price movement of trading instruments (stocks, commodity
futures, bonds, forex, etc.) within a particular time period.
RSI act as an indicator to detect a difference in price momentum. Around the world, many technical
analysts use this indicator and it is among the leading indicators. When the indicator reaches above 70 then
it is taken as overbought and if it shows level 30 then it is taken as oversold. The normal range of RSI is 30-
70.

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6.2.1 : Calculation:
The formula for calculating Relative Strength Index is as follows

RSI = 100 – 100 / (1 + RS)

RS = Average Gain over a specified period/ Average loss over the same period

The default setting for the Relative Strength Index is 14, but you may change this value to decrease or
increase sensitivity based on your requirement.

6.2.2 : Usage:
RSI can be used for many purposes. There are many kinds of usage of RSI. The popular seen that appears is
when 70 level breaching of RSI in combination with a bearish reversal pattern, then this shows that its time to
take advantage of a situation by taking short trade with stop loss. On the other hand, if there is a 30 level
breaching of RSI and the reversal pattern is bullish then it gives the advantage to do long trade with stop loss.

Figure 6.2: RSI

6.3 : ADX:
J. Welles Wilder in 1987, make the trend strength indicator known as the Average Directional Index (ADX).

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ADX evaluates price velocity with respect to its movement i.e., east/west/north/south.
The Charting system has two lines that are the basis of ADX i.e. Positive Directional Indicator (+DI) and
Negative Directional Indicator (-DI).

ADX represents the trending phase of the market when its value is above 20 or 25. The trend can be either up
or down.

To understand whether the market is up or down, when +DI intersects the -Di line from below, then it
shows that the market trend is going up and when the -DI line intersects the + DI line from below, then
this shows that market trend is going in a downward direction.

Figure 6.3: ADX

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Conclusion

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Conclusion

Trading strategies are made by the combination of indicators and price patterns by the competent traders. The
traders that are exceptionally professional use only one thing: they either use an indicator or rely on a price
pattern. After describing the basic concept of charting, our journey ends here. Hope that this will help you in
the future when you integrate these concepts doing live charts and eliminates all your confusion. Technical
analysis is the field that helps practitioners to enhance their knowledge with continuous practice and ongoing
time. Best of luck for your journey.

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