Chart patterns are geometric price formations that signal continuation or reversal. Major patterns include: Head & Shoulders (reversal), Double Top/Bottom (reversal), Bull/Bear Flags (continuation), Rising/Falling Wedges (reversal), Ascending/Descending Triangles (continuation/reversal). All are measured-move patterns with projected price targets.
Head & Shoulders: three peaks with the middle highest. Measured target = head-to-neckline distance projected from neckline break. Double Top/Bottom: two peaks/troughs at similar levels. Flags: small rectangle against the trend. Wedge: converging trendlines (rising wedge = bearish, falling wedge = bullish). Triangles: symmetrical, ascending, descending.
H&S: short on neckline break with volume. Double bottom: buy on neckline break above the peak between the two troughs. Bull flag: buy breakout of the flag with volume. Falling wedge: buy on upper trendline break. Ascending triangle: buy break of flat resistance.
All patterns have measured-move targets: project the pattern height from the breakout point. Stop on the opposite side of the pattern. Volume confirms: if breakout volume is low, the pattern may fail.
4H and Daily are most reliable for pattern formation
Pattern completion rates improve dramatically when you trade WITH the prior trend. A bull flag in an uptrend has a much higher success rate than a bull flag in a downtrend, which is actually potentially a bear flag in disguise.
Gaps occur when price opens significantly above or below the prior close, leaving an unfilled space on the chart. Gap trading strategies exploit the tendency for gaps to either fill (price returning to close the gap) or continue (price extending in the gap direction). Understanding gap types — common, breakaway, runaway, and exhaustion — helps traders determine whether to fade the gap or trade its continuation.
The Moving Average Convergence Divergence (MACD) measures the relationship between two exponential moving averages (typically 12 and 26 period). The MACD line is the difference between these EMAs, and the signal line is a 9-period EMA of the MACD. The histogram shows the distance between MACD and signal lines. MACD is a hybrid trend-following and momentum indicator.
Donchian Channels plot the highest high and lowest low over a specified lookback period, creating a dynamic channel that defines the current price range. Originally popularised by the legendary Turtle Traders, Donchian Channel breakouts capture new trends at their inception by entering when price exceeds the prior range extreme. The channel width also serves as a volatility measure and position-sizing input.
Support and resistance (S/R) levels are price zones where buying or selling pressure has historically prevented the price from continuing in its current direction. Support is a floor where buying emerges; resistance is a ceiling where selling appears. S/R levels are the foundation of technical analysis and provide the framework for every trade setup.