Chart patterns

Mohammad Humayun Kabir

 Chart Pattern
In technical analysis rising and falling in price is often
signaled by price pattern. The technical analysis used
price patterns to examine the current movement and
forecast future market movement.

Chart patterns are one of the most useful tools that

provide a high probability trade setup. In this module,
we will discuss the basic chart pattern and formation.
Chart formation will help you to spot conditions where
the market is ready to breakout. They can also indicate
whether the price will continue in its current direction or
not.
Mohammad Humayun Kabir
Chart Pattern

Mohammad Humayun Kabir

Chart Pattern

Mohammad Humayun Kabir

 Chart Pattern
Head and shoulder pattern is a bearish reversal
pattern formation.

Head and shoulder is a chart pattern in which a larger

peak has a slightly smaller peak on either side of it.

A neckline is drawn by connecting the lowest point of

two swing lows.

Once the third peak has fallen back to the level of

support it is likely to break out into a bearish
downtrend.

Mohammad Humayun Kabir

 Chart Pattern
Key component
• Prior trend:
It is important to understand the trend direction to trade reversal because without a
prior uptrend there cannot be head and shoulder reversal patterns. If a head and
shoulder pattern form without a prior uptrend it is most likely to fail. Head and
shoulder forming after a strong uptrend are valid reversal patterns to trade.

• Left shoulder:
In an up-trending market the left shoulder form at the high of current market
direction. After forming this peak the price decline to form a swing low, and left
shoulder completed at this point and it is 1st for neckline formation. This low remain
above the prior uptrend line, keeping the uptrend intact.

• Head:
After the formation of the left shoulder, the price exceeds prior to high and form
higher high formation and it is marked as top of the trend. After peak formed the
price decline near the level of the prior swing low, and it forms the second point for
the neckline. This low usually breaks the uptrend line and indicates a loss in market
momentum.
Mohammad Humayun Kabir
 Chart Pattern

• Right shoulder:
After the formation of the top, the market declined to form 2nd
point for the neckline. From there Market rises to form a lower peak
(lower high) and it is usually in line with the left shoulder, while
symmetry is preferred but sometimes the shoulder can be
asymmetry in terms of price movement. The decline forms the right
shoulder break the neckline.

• Neckline:
The neckline form by connecting the low of the left and right
shoulder (point 1 and point 2), point 1 is marked as the end of the
left shoulder and beginning of the head. Low 2 is marked as the end
of the head and beginning of the right shoulder. The slope of the
neckline indicates the strength of the bear. A downward slope is
more bearish than the upward slope.
Mohammad Humayun Kabir
 Chart Pattern
How to trade Head and shoulders pattern?
Entry: Connect head and shoulder bottom in a trend line or neckline. When
the price closed below the neckline, a potential short trade is triggered.
Short after one candle close below the low of the breakdown candle.

Target: Compute the vertical distance between the top of the head and
shoulder patterns and the neckline the same distance is taken as target
form the neckline.

Volume confirmation in Head and shoulder

High volume on the first peak.
Moderate volume on the middle peak.
Low volume on the third peak.
A sharp increase in the volume on the breakdown candle.

Mohammad Humayun Kabir

 Chart Pattern
Example of Head and Shoulder pattern

Entry: After a candle closes below the neckline with heavy volume, short entry can be done below that candle
low.
Exit: Minimum target can be place at a distance equal to the distance of head to neckline.

Mohammad Humayun Kabir

 Chart Pattern
How an inverted Head and Shoulder pattern
looks like?

Mohammad Humayun Kabir

 Chart Pattern
What does an Inverse head and shoulder look like?
An inverse head and shoulder pattern is a bullish reversal
pattern formation.

Inverse Head and shoulder is a chart pattern in which a larger

trough has a slightly smaller trough on either side of it.

A neckline is drawn by connecting the highest point of two

swings high.

Once the third peak has risen to the level of resistance it is

likely to break out into a bullish uptrend.

Mohammad Humayun Kabir

 Chart
Key component
Pattern
• Prior trend:
It is important to understand the trend direction to trade reversal, because without a
prior downtrend there cannot be an Inverse head and shoulder reversal patterns. If an
inverse head and shoulder pattern form without a prior downtrend it is most likely to
fail. Inverse Head and shoulder forming after a strong downtrend are valid reversal
patterns to trade.

• Left shoulder:
In a down-trending market the left shoulder form at the low of current market direction.
After forming this trough the price rises to form lower high, and left shoulder completed
at this point and it is 1st for neckline formation. This high remain below the prior down
trend line, keeping downtrend intact.

• Head:
After the formation of the left shoulder, price decline below prior low and form lower
low formation and it is marked as the bottom of the trend. After trough formed the price
advance near the level of prior swing high, and it forms the second point for the
neckline. Starting of the Right Shoulder usually breaks the downtrend line and indicates
a loss in market momentum. Mohammad Humayun Kabir
 Chart Pattern 1 2

Key component
• Right shoulder
After the formation of the bottom, the market rises to form 2nd point for the neckline.
From there Market decline to form a higher trough (higher low) and it is usually in line
with the left shoulder .while symmetry is preferred but sometimes shoulder can be
asymmetry in terms of price movement. The rise form the right shoulder breaks the
neckline.

• Neckline:
The neckline form by connecting the low of the left and right shoulder (point 1 and
point 2), point 1 is marked as the end of the left shoulder and beginning of the head.
Low 2 is marked as the end of the head and beginning of the right shoulder. The slope
of the neckline indicates the strength of the bulls. The upward slope is more bullish
than the downward slope.

Mohammad Humayun Kabir

 Chart Pattern
How to trade Inverse Head and shoulders pattern?
Entry: Connect Inverse head and shoulder top in a trend line or neckline. When the
price closed above the neckline, a potential long trade is triggered. Long after one
candle closes above the high of the break out a candle.

Target: Compute the vertical distance between the bottom of the Inverse Head and
shoulder patterns and the neckline the same distance is taken as target form the
neckline.

Volume confirmation in Inverse Head and shoulder

• High volume on the first peak
• Moderate volume on the middle peak
• Low volume on the third peak
• A sharp increase in the volume on the break out candle.

Mohammad Humayun Kabir

 Chart Pattern
Example of Inverse Head and Shoulder pattern

Entry: After a candle closes above the neckline with heavy volume, long entry can be done above that candle high.
Exit: Minimum target can be place at a distance equal to the distance of head form neckline
Stop loss: Stop loss must be place below the low of the right shoulder.
Mohammad Humayun Kabir
Chart Pattern
Double Top
pattern

Mohammad Humayun Kabir

 Chart Pattern
Double Top
pattern

A double top pattern occurs when the price fails to make a new high.

Double top patterns are relatively reliable and easy to trade. Also, these
patterns fail as they may potentially form triple or multi top formation.

The double top usually signals the end of the Bull Run depending on the
width of the top formation.

The volume in the first swing should be heavier than the second swing. In
addition to that volume must be heavier on the breakdown bars.

If the breakdown volume is weaker it may be signaling a triple top

formation.
A double top is an important pattern that trader use to spot key reversal
point in a trend.

Mohammad Humayun Kabir

 Chart Pattern
Double Top
pattern

How to trade in a Double Top pattern?

Trade: A double top pattern confirmation occurs at the breakdown level
of swing lows at the neckline.

Enter: After a candle breaks the neckline with heavy volume, a short
trade can be entered below the breakout candle low.

Target: Double top patterns do offer a good risk and reward ratio.
Measure the distance between the top of the pattern to the neckline for
a potential target range from the entry-level.

Stop loss: Double top also fails and forms the triple top or multi top
patterns. Usually, the double top pattern failure occurs when price
reversal and trade in the middle of the double top pattern. Enter stop
order in the middle of the pattern range to protect the trade.

Mohammad Humayun Kabir

 Chart Pattern
Double Top
pattern
Volume confirmation in the Double Top:
A trader should pay close attention to volume when analyzing a double top.

Generally, Volume in a double top is higher on the left top than the right.

Volume tends to be downward as the patterns form.

Volume increase again when the pattern completes, breaking through the confirmation points

Rules for the Double Top:

If the second peak is higher more than 3% of the first, the pattern may not be a double top.

If the second peak stays higher than the first peak by more than a couple of days then the
pattern may not be a true double top.

Two peaks don't need to have the same price level and it does not mean an invalid pattern.
Mohammad Humayun Kabir
 Chart Pattern
Double Top
pattern

Entry: After the price breaks the neckline, we can place our short position or we can enter at a retest of the
neckline if retest occurs.
Exit: For this setup, our minimum target will be equal to the distance of peak form neckline (H).
Stop loss: To protect our capital from a failure setup it is necessary to place a stop order above the peak of the
pattern. Mohammad Humayun Kabir
Chart Pattern
Double Bottom
pattern

Mohammad Humayun Kabir

 Chart Pattern
Double Bottom
pattern
A double bottom is a bullish reversal pattern.

The double bottom pattern indicates the dominance of the buyer in the market.

Inside a double bottom, price drop to a support level then rise to a resistance level and gain
drop to form the second leg of the double bottom.

After the formation of the second leg of the double bottom, the price will rise and break the
resistance level.

Finally, the trend will reverse and the price will go up as the trend became bullish.

Note: The trading rule for the double bottom pattern is similar to the double top pattern, the
only difference
is that we were taking a short position is double top, whereas we are looking for a long trade
setup in the double bottom pattern. Double top and double bottom are opposite to each other
in terms of their characteristic. Mohammad Humayun Kabir
Chart Pattern
Triple Top pattern

Mohammad Humayun Kabir

 Chart Pattern
Triple Top pattern

Triple top patterns are multiple top patterns indicating exhaustion of the
buyer in the market as price tries to make new high and fail.

The triple top pattern looks like a head and shoulder pattern, and it is a
reliable pattern to trade.

The triple top pattern does tend to fail, so you must always follow
proper risk management.

Triple top pattern lows must be within the range of 2% to 5% of the

price.

The triple top is relatively easy to detect and offer a good risk to reward
ratio.

A confirmation is needed before entering to trade, heavy volume during

the breakout of the neckline. Mohammad Humayun Kabir
 Chart Pattern
Triple Top pattern
Volume confirmation in the triple top:

A trader should pay close attention to volume when analyzing a

triple top.

Generally, Volume in a triple top is higher in the 1st top than the
other.

Volume tends to be decline as the patterns form.

The third top must-have the lowest volume, indicating the

exhaustion of buyers.

Volume increase again when the pattern completes, breaking

through the confirmation points.

Mohammad Humayun Kabir

Chart Pattern
Triple Top pattern

Mohammad Humayun Kabir

 Chart Pattern
Triple Top pattern
The triple bottom patterns are a reversal pattern that occurs at a major market
bottom.

Triple bottom patterns formed when price failed to make new lows on three
different levels.

Most triple bottom patterns lows occur within 2% to 5% of the price range.

The triple bottom is relatively easy to detect and offer a good risk to reward
ration.

Trade can only be indicated after a confirmation.

For confirmation, we will look for heavy volume in the first swing down but the
rest of the swing will have decreasing volume.

During the breakout of the neckline, there must be a sharp increase in volume.

Note: Trading rule for the triple bottom pattern is similar to the triple top pattern,
the only difference is that we were taking a short position is triple top, whereas
we are looking for long trade setup in triple bottom pattern .triple top and
Mohammad triple
Humayun Kabir
Chart Pattern

Mohammad Humayun Kabir

 Chart Pattern
Triple Bottom
pattern

Entry: After the price breaks the neckline with heavy buying volume, we can place our long position. or we can
enter at a retest of the neckline if retest occurs.
Exit: For this setup, our minimum target will be equal to the distance of the bottom price to the neckline.
Stop loss: To protect our capital form a failure setup it is necessary to place a stop order so for this setup we will
place our stop loss below the bottom of the pattern. Mohammad Humayun Kabir
 Chart Pattern

Falling Wedge:
In this session of Module 3,

we have discussed reversal patterns that are used by the majority of trader.
Head & Shoulder, double top, and triple top are bearish reversal patterns.

The inverted head & shoulder, double bottom and triple bottom are bullish
reversal patterns.

These are high probable setup which provides good risk and reward ratio. As these
patterns are easy to identify in a trending market, traders can easily spot them
and following above mention rules will surely help them to trade in a disciplined
manner.

Mohammad Humayun Kabir

WEDGE:
WEDGES ARE THE TYPE OF CONTINUATION AS
WELL AS THE REVERSAL CHART PATTERNS.

FALLING WEDGE:
A falling wedge is formed by two converging trend lines
when the stock's prices have been falling for a certain
period.

RISING WEDGE:
A RISING WEDGE IS FORMED BY TWO CONVERGING TREND
LINES WHEN THE STOCK'S PRICES HAVE BEEN RISING FOR
A CERTAIN PERIOD.
Mohammad Humayun Kabir
Chart Pattern

Thank
you

Mohammad Humayun Kabir