CHARTS AND THEIR

PATTERNS
© 2017 BSE Institute Limited
Pattern Significance
• Get their significance from size and depth.
• Longer the period, greater the size and depth, longer will be
the period of the pattern.
Example: Difficult to break a bull trend in existence for a couple
of years.
Check:
a. If the pattern separates a primary bull market from a primary
bear market.
b. A formation between intermediate rally and a reaction.
c. A short term intraday top.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 2

Measuring Implications

• Each of the technical patterns offers measuring implications.

• Except in triangles, the principle is to measure its depth and
project this distance from the breakout point.
• For a rectangle the maximum distance is the space separating
the two parallel lines-showing how prices normally move
between the two lines.
• In case of a breakout, there is a retracement move, taking the
price towards the pattern or to its outer extremity.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 3

Major Types of Chart Patterns
• Reversal Pattern: (RP)
signals that a prior trend will reverse upon
completion of the pattern.

• Continuous Pattern: (CP)

signals that a trend will continue once the pattern is
complete.
These patterns can be found over charts of any
timeframe.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 4

Reversal Patterns
• Reversal Pattern: (RP)
Signals that a prior trend will reverse upon
completion of the pattern- either upwards or
downwards. The following are the patterns:
During an uptrend During a down trend
Double Tops Double Bottoms
Triple Tops Triple Bottoms
Head and Shoulders Tops Inverse Head and
shoulders- (Bottoms)

TA4/ Charts and their patterns © 2017 BSE Institute Limited 5

Reversal patterns - Uptrend
• Double Tops
- Up-trending stock price hits the same resistance level
twice in the consolidation zone.
- A bearish reversal pattern typically found on bar
charts, line charts and candlestick charts.
- Is made up of two consecutive roughly equal peaks,
with a moderate trough in-between.
- Double top Breakouts on line chart are bearish.
- On P&F charts they are bullish.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 6

Reversal patterns - Uptrend
• Double tops- Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 7

Reversal patterns - Uptrend
• Triple Tops

- Up-trending stock price hits the same resistance level three

times in the consolidation zone.
- The bounce off the resistance near the third peak is a clear
indication that buying interest is waning.
- Used by traders to predict reversal of uptrend.
- Traders take a short position once asset falls below the identified
support level (shown by the black line in the chart).

TA4/ Charts and their patterns © 2017 BSE Institute Limited 8

Reversal patterns - Uptrend
• Triple Tops - Illustration:

TA4/ Charts and their patterns © 2017 BSE Institute Limited 9

Reversal patterns - Uptrend
• Head and Shoulders Top

- Rises to a peak and subsequently declines.

- The price rises above the former peak and again
declines.
- And finally, rises again, but not to the second peak, and
declines once more.
- The first and third peaks are shoulders, and the second
peak forms the head.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 10

Reversal patterns - Uptrend
• Head and Shoulders Top- Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 11

Reversal patterns - Downtrend

• Double Bottom
- It describes the drop of a stock (or index)
- a rebound and
- another drop to the same (or similar) level as the original drop
- and finally another rebound
- the advance off of the first bottom should be 10-20%.
- The second bottom should form within 3-4% of the previous
low, and volume on the resulting advance should increase.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 12

Reversal patterns - Downtrend
• Double Bottom- Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 13

Reversal patterns - Downtrend
• Triple Bottom:
- Price of an asset creates three troughs at nearly the same price
level.
- The third bounce off indicates that demand is outweighing
supply and that the trend is in the process of reversing.
- Every time the price reaches a peak and then retraces back
toward the prior support.
- Traders will enter a long position once the price breaks above
the previous resistance (illustrated by the black line on the
chart).

TA4/ Charts and their patterns © 2017 BSE Institute Limited 14

Reversal patterns - Downtrend
• Triple Bottom:- Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 15

Reversal patterns - Downtrend
• Inverse Head and Shoulders :
- The price falls to a trough and then rises.
- The price falls below the former trough and then rises again.
- Finally, the price falls again, but not as far as the second trough.
- Investors enter into a long position when the price rises above
the resistance of the neckline.
- The first and third trough are shoulders, and the second peak
forms the head.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 16

Reversal patterns - Downtrend
• Inverse Head and Shoulders: Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 17

Continuation Patterns

• Occur mid-trend
• They are a pause in the price action of varying durations.
• Can indicate the trend is likely to resume after the pattern
completes (when the pattern has formed and can be drawn).
• These "break out" of that pattern, potentially continuing on with
the former trend.
• Can be seen on all time frames.
• Common continuation patterns include triangles, flags, pennants
and rectangles.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 18

Continuation Patterns - Triangles

• Horizontal trading patterns.

• At the start of its formation, the triangle is at its widest
point.
• When market continues to trade in a sideways pattern,
then point of the triangle is formed.
• Shows losing interest in an issue, both from the buy
side as well as the sell side.
• Supply line diminishes to meet the demand.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 19

Triangles - Details
• Lower line of the triangle is the demand line representing
support on the chart.
• At this point, the buyers of the issue outpace the sellers, and the
stock's price begins to rise.
• Top line of the triangle - supply line.
• Represents the overbought side of the market with profit taking.
• Three types of triangles:
• Ascending
• Descending and
• Symmetrical

TA4/ Charts and their patterns © 2017 BSE Institute Limited 20

Triangles - Ascending
• Often a bullish chart pattern.
• Is a slam-dunk as an entry or exit signal.
• A trend should be in place for a triangle to be
considered as a continuation pattern.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 21

Cont’d..

• In the figure uptrend is in place.

• Demand line, or lower trend line is drawn to touch the base of
the rising lows.
• Two highs at the top line- need not reach the same point but
should be close to each other.
• The buyers may take a few runs at the supply line before
establishing new low and new highs.
• Increasing trading volume will lead to new highs.
• Normally lasts between 3 weeks to 90 days.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 22

Triangles - Descending
• Recognized primarily in downtrends
• Often thought of as a bearish signal.

• Upside-down image of the ascending triangle pattern.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 23

Triangles - Descending

• The two lows on the above chart form the lower flat
line of the triangle- should be close need not be same.

• Volume again plays an important role in the breakout

to the downside.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 24

Triangles - Symmetrical-Illustration

• Aimless in direction.

• Highs and lows come together with no significant

volume.

• Once the investors decide to increase or decrease the

price, break out in the direction of the stronger trend.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 25

Triangles-Symmetrical

TA4/ Charts and their patterns © 2017 BSE Institute Limited 26

Flags, Pennants and Rectangles

• The flag and pennant closely resemble each other.

• Differ only in their shape during the pattern's
consolidation period.
• They are often used interchangeably.
• A flag is a rectangular shape, while the pennant looks
more like a triangle.
• Formed when there is a sharp price movement
followed by generally sideways price movement,
which is the flag or pennant.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 27

Flags, Pennants and Rectangles
(Contd..)
• The pattern is complete when there is a price breakout
in the same direction of the initial sharp price
movement.
• The following move is in the same direction as the
prior sharp move.
• The complete move - from the first to last sharp move
is referred to as the flag pole.
• The reason for their formation is market consolidation
after a large price move.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 28

Continuation Patterns - Flags

• The flag pattern looks like a rectangle.

• Formed by two parallel trend lines that act as support

and resistance for the price until the price breaks out.

• In general, the flag will not be perfectly flat but will

have its trend lines sloping.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 29

Flags - Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 30

Flags - How the pattern behaves?

• The slope of the flag should move in the opposite

direction of the initial sharp price movement.

• The buy or sell signal is formed once the price breaks

through the support or resistance level.

• The trend continues in the prior direction.

• This breakthrough happens with volume.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 31

Continuation pattern - The Pennant

• Forms a symmetrical triangle, where the support and resistance

trend lines converge towards each other.

• Does test each support or resistance line several times.

• Direction of the pennant is not as important as it is in the flag.

• Pennant is generally flat.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 32

Pennant - Illustration

TA4/ Charts and their patterns © 2017 BSE Institute Limited 33

Flag, Pennant - General characteristics
• The price movement prior to the flag or pennant
should be a strong, sharp move.
• Takes less time to form during downtrends than in
uptrends.
• Generally short-term patterns lasting one to three
weeks, but can be formed over longer periods.
• The volume should be strong during the breakout to
confirm the signal.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 34

Other Important Patterns
• Cup & Handle:

- A bullish continuation pattern.

- Upward trend has paused but will continue in an upward
direction once the pattern is confirmed.
- Pattern forms what looks like a cup, which is preceded by an
upward trend.
- The handle forms a downward / sideways movement in the
security's price.
- Once resistance is overcome the upward trend can continue.

TA4/ Charts and their patterns © 2017 BSE Institute Limited 35

Other Important Patterns
• Cup & Handle - Illustration:

TA4/ Charts and their patterns © 2017 BSE Institute Limited 36

Other Important Patterns
• Gaps:
- An empty space between a trading period and the following
trading period.
- Occurs due to large difference in prices between two sequential
trading periods.
- Gaps can be found on bar charts and candlestick charts but not
on point and figure or basic line charts.
- Shows that some significant happenings.
- Three main types: Break away (beginning of the trend), Run
away (Middle of trend) and Exhaustion (End of trend).

TA4/ Charts and their patterns © 2017 BSE Institute Limited 37

 THANK YOU
© 2017 BSE Institute Limited