Technical Analysis Basics
Common Chart Patterns
Why Patterns Work
Chart patterns work because they represent recurring human psychology. Fear, greed, and indecision create recognizable formations. When enough traders see and act on a pattern, it becomes a self-fulfilling prophecy.
Reversal Patterns
Head and Shoulders (Bearish Reversal)
- Left shoulder → Head (higher) → Right shoulder
- Neckline connects the lows
- Breaks below neckline = Target is head height projected down
Inverse Head and Shoulders (Bullish Reversal)
- Same pattern, upside down
- Breaks above neckline = Bullish
Double Top (Bearish)
- Two peaks at similar level, "M" shape
- Breaks below middle = Bearish target
Double Bottom (Bullish)
- Two lows at similar level, "W" shape
- Breaks above middle = Bullish target
- Left shoulder → Head (higher) → Right shoulder
- Neckline connects the lows
- Breaks below neckline = Target is head height projected down
Inverse Head and Shoulders (Bullish Reversal)
- Same pattern, upside down
- Breaks above neckline = Bullish
Double Top (Bearish)
- Two peaks at similar level, "M" shape
- Breaks below middle = Bearish target
Double Bottom (Bullish)
- Two lows at similar level, "W" shape
- Breaks above middle = Bullish target
The "W" and "M" patterns are among the most reliable and easy to spot. Look for them at major support/resistance levels.
Continuation Patterns
Bull Flag
- Strong move up (flagpole)
- Consolidation downward (flag)
- Break up continues the trend
- Target = flagpole height added to breakout
Bear Flag
- Same concept, inverted
Triangle Patterns
- Ascending: Flat top, rising lows → Usually breaks up
- Descending: Flat bottom, falling highs → Usually breaks down
- Symmetrical: Converging lines → Can break either way
- Strong move up (flagpole)
- Consolidation downward (flag)
- Break up continues the trend
- Target = flagpole height added to breakout
Bear Flag
- Same concept, inverted
Triangle Patterns
- Ascending: Flat top, rising lows → Usually breaks up
- Descending: Flat bottom, falling highs → Usually breaks down
- Symmetrical: Converging lines → Can break either way
GME runs from $20 to $30 (flagpole = $10) Consolidates down to $27 (flag) Breaks above $30 → Target: $30 + $10 = $40
Bull flag target calculation
Cup and Handle
One of the most powerful bullish patterns:
1. Cup: U-shaped decline and recovery (not V-shaped)
2. Handle: Small pullback forming the "handle"
3. Breakout: Above the cup's rim
4. Target: Depth of cup projected upward
This pattern can take weeks to months to form, making it especially reliable.
1. Cup: U-shaped decline and recovery (not V-shaped)
2. Handle: Small pullback forming the "handle"
3. Breakout: Above the cup's rim
4. Target: Depth of cup projected upward
This pattern can take weeks to months to form, making it especially reliable.
Patterns fail! Always use stop-losses. A failed pattern often means a strong move in the opposite direction.
Key Takeaways
- Reversal patterns signal trend changes (H&S, double tops/bottoms)
- Continuation patterns signal pauses in trends (flags, triangles)
- Calculate price targets using pattern measurements
- Failed patterns often lead to strong moves the other way