Unraveling the Tapestry: Chart Patterns

In the world of trading, charts serve as a visual representation of price actions over a specific period.

Traders use these charts to identify patterns and apply various indicators that could suggest future price movements.

This chapter will delve into the importance of chart patterns and indicators in the trading landscape.

Chart Patterns

Chart patterns are specific formations created by price movements on a trading chart. They are a crucial component of
technical analysis, a trading method that relies on price history, trends, and patterns to predict future price movements.

Let's explore some of the most common chart patterns:

Head and Shoulders: This pattern consists of three peaks, with the middle peak (the head) being higher than the two
others (the shoulders). A head and shoulders pattern typically signals a reversal of an uptrend.
Double Top and Double Bottom: These patterns indicate that the price has hit a high or low point twice and is likely to
reverse. A double top signals a bearish reversal after an uptrend, while a double bottom signals a bullish reversal after a
downtrend.
Triangles: Triangle patterns, including ascending, descending, and symmetrical triangles, represent periods of
consolidation before the price breaks out. The direction of the breakout can help predict whether the price will rise or
fall.

Recognizing chart patterns and understanding indicators are fundamental skills in trading. They provide key insights into
market psychology and help traders make informed decisions. However, it's important to remember that no single pattern
or indicator can guarantee success. They are tools to assist in decision-making, not a guarantee of certain outcomes. As
always, effective trading requires a mix of strategies, thorough research, risk management, and continuous learning.
 Rising Wedge Inverse Head & Shoulders Double Bottom Tops Rectangle

CHART
Stop
Target Target

SELL/SHORT

PATTERNS
Stop
Neckline BUY/LONG
Neckline BUY/LONG
Support SELL/SHORT
Stop

Target
Target

Double Top Head & Shoulders Bullish Rectangle Bullish Pennant Rising Wedge Ascending Scallop
Target
Target
Target

BUY/LONG
Stop
Stop BUY/LONG
Stop
Resistance BUY/LONG
Neckline SELL/SHORT
Neckline SELL/SHORT SELL/SHORT
Stop
Stop
Stop

Target Target Target

Falling Wedge Falling Wedge Descending Scallop

Ascending Triangle Descending Triangle Symmetrical Triangle
Target Target
Target
Target Stop

BUY/LONG
BUY/LONG
BUY/LONG
Stop Support
SELL/SHORT SELL/SHORT
BUY/LONG
Stop SELL/SHORT
BUY/LONG Stop
SELL/SHORT
Stop

Target
Stop
Target

Bearish Rectangle Bearish Pennant Flag Symmetrical Triangle 3 Descending Valleys Cup and Handle
Target
1
2

Stop
Stop 3
Stop
Stop Resistance BUY/LONG

Stop

SELL/SHORT
SELL/SHORT SELL/SHORT
SELL/SHORT
SELL/SHORT Stop

Target

Target Target
Target

Diamond Bottoms Target

Flag 3 Rising Valleys Inverted Cup & Handle

Target

Target

PRICE
Target

BUY/LONG BUY/LONG Stop

ACTION
SELL/SHORT
Stop Stop
Stop BUY/LONG
3
2

1 Target
 The Story and Psychology Behind Trading Patterns

Patterns are an inherent part of human existence. We look for patterns in nature, in our daily routines, and even in our social
interactions. In the realm of trading, we seek patterns in the ceaseless flux of market prices.

These patterns, often revealing the hidden psychology of the market, serve as a roadmap to understanding and predicting
potential future price movements.

1. Understanding Trading Patterns

Trading patterns are identifiable formations that appear on price charts.

They represent the collective actions and sentiments of all market participants, from the institutional investor to the retail
trader.

Each pattern tells a unique story about the market’s direction and the power struggle between buyers and sellers.

2. The Psychology Behind Patterns

The psychological underpinning of trading patterns is the constant interplay between fear and greed, the two primary
emotions driving market decisions.

Fear can cause rapid sell-offs, creating downtrends, while greed can prompt buying sprees, resulting in uptrends. Moreover,
the human tendency for predictability and repetition often leads to recurring patterns.

Let's consider a classic pattern: the Head and Shoulders. This pattern typically signals a bearish reversal. It forms when a
stock's price rises to a peak (the left shoulder), falls, rises to a higher peak (the head), falls again, and finally rises to a peak
similar to the first one (the right shoulder).
The pattern is complete when the price falls below the neckline, the support level connecting the two lows after the left
shoulder and head.

The psychology behind this pattern revolves around changing market sentiment. Initially, confidence is high as the price
rises to form the left shoulder and the head.

However, the failure to maintain these heights indicates a potential weakness. When the price fails to reach a new high on
the right shoulder, it signals a decline in bullish sentiment.

The break below the neckline confirms the bears have taken control.

3. The Story of the Market

Every trading pattern tells a story of the market's shifting dynamics.

For example, the Cup and Handle pattern depicts a period of consolidation followed by a breakout, like a stock taking a
breather before running a marathon.

It shows how after a strong uptrend, the market consolidates, with sellers attempting to push prices down, but buyers
eventually stepping in at a higher level, signaling their increased eagerness to buy. When the price breaks above the previous
resistance (the rim of the cup), it indicates the buyers have won the tug of war.

4. Emotional Discipline and Pattern Recognition

Recognizing these patterns requires discipline, as market participants are often swayed by their emotions. Traders must
resist the urge to act on every price fluctuation, focusing instead on discerning meaningful patterns from market noise.

Emotionally-driven decisions may lead to entering or exiting trades at inopportune moments, detracting from the
effectiveness of pattern-based trading.

In conclusion, trading patterns provide a window into the market’s collective psychology, representing the ongoing battle
between fear and greed. By understanding the story each pattern tells, traders can gain insight into the market’s potential
future movements, and make more informed trading decisions. Trading is not just a financial endeavor; it is a psychological
game where understanding human behavior can be just as important as understanding numbers.
 Pattern Fakeouts & Breakouts

Being successful in trading and investing is challenging

because it involves money-complex elements that require research
from both technical and psychological angles. If you're willing to try yourself in this industry you have to be prepared for
anything.

It may be hard to predict price movement at first. Or. even at first nothing's gonna make sense to you. How this s**t work!?

As time goes on and you acquire knowledge, you begin

to understand what's the science behind all of this and everything's starting to make more sane choices.

In this article, I will try to explain to you what's the fakeout and what is the breakout. Every professional trader trades
breakouts or just simply draws patterns to get extra help to predict price action.

I believe that every one of you knows what the breakout is and how does it look like on the live charts. But again, take a look
below with an explanation:

When the price properly breaks an important level and keeps making further
moves up or down, this is known as a breakout.
You know that I like to trade Crypto, but here we have an example of EUR/USD
in 1 Hour Timeframe. Probably this breakout is due to some important news,
that's why the price broke out the top by more than 170+ pips (2.5%) in such a
short time. This type of breakout is called momentum breakout.

Further
push up

Breakout

A small fakeout
is hiding here
UPS! What do
we have here!?
Here are some examples of these nasty fakeouts that
could eat your money by hitting your stop/loss:

Triangle Fakeout

A fakeout is what the price tries

to break above or below a
crucial zone and it fails to
continue.
It frequently relates to stop/loss
Range Fekeout
hunting and liquidity grabbing.
In order to show this, look at
how the price tries to continue
heading upwards but fakes out
of the range and returns to the

Channel Fakeout edges of it. Every new person who

wants to try their fortune in trading
gets hunted by the bigger players.
 Real-Time Example:

Here you go, we have an example of the ETH/USD 1H. We can see how a
range is formed in which the price moves up and down, there is an
attempt to break out from the top, and despite significant bullish
momentum, the price returns back to consolidation.

Fakeout
So how do you differential all this to know when it's happening? Well,
unfortunately, you can't, but you can increase your chances if you wait for
the right confirmation. At the end of the day, we are all traders
speculating on these things, we don't have a crystal ball to predict the
future. It's impossible.

Fakeout

Breakout

Breakout

Breakout

Breakout
You must keep in mind, though, that it is not a guarantee that a re-test
will take place each time or be successful. Of course, by waiting for that
retest price action you can minimize your chance to lose more.
There are times when breakouts are so aggressive that the price does
not retrace to re-test a zone that was broken, but that includes some
upcoming market news, etc.
Also, let's be honest. There are tons of tools in TradingView, in 3rd party
tools or simple in your knowledge, experience, and proper risk
management, that can protect you from all of this crazy trading noise:
fakeouts, liquidity grabs, hunting whales, etc. You have to watch
upcoming news, control your emotions, wait for a perfect time to enter
your position, watch the money flow, and be able to see the bigger
picture, not only blanket patterns.
 So..kids? What did you learn
at school today?
In trading, nothing is always perfect.
Not all breakouts will lead to a re-test before impulsive continuations.

You can't predict if the breakout won't become a fakeout.

Waiting for a correction and a retest of the zone with confirmation is a

good way to avoid fake breakouts and take advantage of trades and
opportunities with a higher risk-to-reward ratio.