BEGINNER / INTERMEDIATE

4. D
 iscovering Multiple
Period Chart Patterns
H A N TE C R E SE A R C H WE BINARS - Technical Ana lysis Series

One of the basic premises in technical analysis is

that history repeats itself and the theory behind
chart patterns is based on this assumption. A
chart pattern is a distinct formation on a price
chart that gives an indication of the future price
movement.
It is through recognising these chart patterns
that we can get an indication of how high
the probability of a price moving in a specific
direction is. In short, we look for chart patterns
to identify trading opportunities.

Technical pattern analysis is an art form, it is not

a science, and subsequently it is very difficult to
automate. This is why one traders view on the chart
may differ from anothers. The main issue with pattern
recognition is that traders can often be so desperate to
see a pattern that they fool themselves into believing
one is there, when it is not. Unless the pattern jumps
out of the screen then caution should prevail. Seeing
something that is not there suggests that you will be
trading on incorrect information, which can often lead
to losses.
Chart pattern analysis can be used to make shortterm or long-term forecasts. The analysis can be done
intraday, daily, weekly or monthly and the patterns
can be as short as a matter of minutes or as long as a
number of years. In the following, some of the more
popular chart patterns will be reviewed.

As previously discussed in our Trade with

Trendlines session, there is a popular saying in
technical analysis, the trend is your friend. A
trend is merely an indicator of an imbalance
in the supply and demand which is shown
through changes in acceptable levels of the
price. These price changes can often develop into
recognisable chart patterns that act as signals for
deriving potential future movements in price.
Most importantly though, chart patterns in
technical analysis can help to determine whether
it is the bulls that are winning the battle, or it
is the bears. As a trader it is possible to then
position yourself accordingly.

Top Tip: Dont see

what isnt there!
When learning about technical pattern
recognition, one of the big mistakes to
avoid is to think that you see a pattern
that is not there.

If it doesnt hit you between

the eyes, then it is not a pattern.

Chart Patterns

In my experience, this can often be the

case with patterns that have a sloping
neckline.

There are two main categories of charting patterns:

Reversal patterns

Continuation patterns

The Reversal pattern suggests that the current

trend is coming to an end and that the pattern is a
signal for the beginning of a new trend.

The Continuation pattern signals that the existing

trend will remain in place after a period of
consolidation and the completion of the pattern. 1

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Reversal Patterns: Tops and Bottoms

Whats in a name? A top is just a top and a bottom is just a bottom.

Just before we delve into the detail of the variety of tops

and bottoms, I am going to keep it simple. Whether you
are looking at a Head & Shoulders top, a Double Top, a
Triple Top or a Rounding Top, the implied target will be the
same. It will still be measured from the pattern peak to the
neckline and projected downwards.

Is it a head and shoulders?

Or is it a double top?

Therefore there is no need to get bogged down with what you call your top pattern. As long as the
basic principles of building the pattern are there, a top is a top. The basics of technical analysis can be
formed in Dow Theory, which states that uptrends are defined as a series of higher highs and higher lows
(downtrends are defined as a series of lower lows and lower highs).
Therefore, as long as you have a high in the price with a subsequent reaction low; followed by renewed
upside which fails at or just below the previous high (breaking the sequence of higher highs), and a move
back below the previous reaction low (breaking the sequence of higher lows), the top pattern will be
complete.
Ultimately, the number of times that the highs and lows are tested before the pattern completes is of
minor detail (although it can add to the conviction on the break). The most important fact we need to be
concerned with is the fact that a reversal pattern has completed and there is a change of trend underway.

Trading the Pullback

Very often on the completion of a pattern breakout, there will also be a pullback. The pullback uses the
principle that in a bullish breakout, old resistance becomes new support; whilst in a bearish breakdown, old
support becomes new resistance. Subsequently, in an upside breakout, this pullback correction gives the bulls
a second chance to buy. Also, in a downside break, a pullback rally gives the bears a second chance to sell.

Fig 1. Illustrating the concept of a pullback

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Head & Shoulders

This is one of the most popular and reliable chart patterns in technical analysis. A head & shoulders is a reversal
chart pattern that when formed, signals that the price is likely to move against the previous trend. There are
two versions of the head & shoulders chart pattern. The Head & Shoulders Top is a pattern that is formed at
the high of an upward movement and signals that the upward trend is about to end. A Head & Shoulders
Bottom, also known as an inverse head and shoulders is the opposite pattern and is used to signal a reversal in
a downtrend.

Fig 2. A head & shoulders top on the STOXX 600 hourly chart

Both of these head &

shoulders patterns are
similar in that there are
four main parts: two
shoulders, a head and
a neckline. Also, each
individual head and
shoulder is comprised of
a high and a low. For
example, in Fig 2, the
right hand shoulder is
made up of a low at the
support of the neckline,
followed by a lower high
and subsequent breach of
support to complete the
pattern. Remember that an
upward trend is a period of
successive rising highs and
rising lows. With the head
& shoulders top pattern,
the neckline is a level of
support throughout the
pattern that illustrates a
weakening in a trend that
subsequently breaks down.

Fig 3. A head & shoulders bottom on the Sterling/Dollar hourly chart

Also note how in Fig 3, in the second hour following the completed breakout,
there is a pullback correction back to the neckline support which gives a second chance to buy.
Technical analysis theory suggests that a target can be derived from the completed head and shoulders pattern.
For the top patterns, measuring the move from the tip of the head to the neckline and then projecting this
measurement downwards gives us an implied downside target.

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Double Tops and Double Bottoms

Double Tops and Double Bottoms are popular trend reversal patterns. Formed after a sustained
trend, the pattern is created when a price movement tests support or resistance levels twice and is
unable to break through. The breakouts from double tops and bottoms are often considered to
move with greater conviction than other reversal patterns.

Fig 4. A double top on the Euro/Dollar hourly chart

Fig 5. A double bottom on the Dollar/Yen hourly chart

In the double top

pattern, the price
movement has twice
tried to move above
a certain price level.
After two unsuccessful
attempts at pushing the
price higher, the trend
reverses and the price
heads lower. In the case
of a double bottom, the
price movement has tried
to go lower twice, but
has found support each
time. After the second
bounce from the support,
the price begins a new
trend and heads higher.
As with the head &
shoulders patterns, a
target can be derived
from the breakout. For
double bottoms, measure
from the limit of the
troughs to the neckline
and project higher; whilst
for double tops, measure
from the two peaks to
the neckline and then
project downwards.

N.B. Imperfect
pattern targets
Patterns are imperfect where the reaction from the neckline in the second move may not be
quite as large as the first move, leaving a pattern that is not uniform in shape.
You can either derive a conservative target (from the smaller peak/trough)
or measure the full implied target (higher conviction).
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H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Triple Tops and Triple Bottoms

Triple tops and triple bottoms are extensions
of the double top and bottom reversal pattern.
Although not as frequently occurring as head
& shoulders, double tops and double bottoms,
they act in a similar fashion. Both patterns are
formed when the price tests a level of support
or resistance three times and is unable to break
through. The breakdown at the neckline signals
a reversal of the prior trend.

N.B. A Triple Top or

a Range Breakout?
The triple formation in reversal patterns
is also the opposite of many Range
Breakouts which are continuation
patterns (see later).

Rounding Tops and Bottoms

Another multiple top and bottom formation is the Rounding Top and Rounding Bottom. Once
more this is a pattern that consists of neckline before the construction of a rounding element to the
pattern rather than an obviously defined series of peaks or troughs. This is far more of a generic
pattern and is often referred to as rounding due to the lack of clarity with the pattern. However,
there is still a topping or bottoming process that plays out and therefore needs to be covered.

Fig 6. A rounding bottom on the Dollar/Swiss hourly chart

The implied target of the rounding bottom pattern comes from the measurement from the key low
up to the neckline resistance and then projected upwards. The rounding top is the opposite.

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Continuation Patterns - Triangles, Flags, Wedges and Ranges

A downside break from an ascending triangle

An upside break from a consolidation range

Continuation patterns are technical consolidation patterns that ultimately breakout in the direction
of the prevailing trend prior to the consolidation.

Triangles
Triangles are some of the most well-known
consolidation patterns used in technical analysis.
The two main types of triangles, which vary in
construct and implication, are the ascending
triangle and descending triangle.
The Ascending Triangle develops as a
consolidation in the price during a bullish trend.
In an ascending triangle, the upper trendline
is flat, while the bottom trendline is upward
sloping. The ascending triangle is generally
thought of as a bullish pattern in which chartists
look for an upside breakout. The price knocks
up against the resistance, whilst continuing to
leave a series of higher lows. The eventual break
through the resistance can often be seen with
a burst through a supply vacuum and a sharp
rise in price. The implied target derived from
the pattern uses the upslope of the triangle,
projected higher from the resistance point.

N.B.
The Third Triangle
There is a third triangle pattern, the
symmetrical triangle, which is a pattern
where the two trendlines converge
toward each other. However this is
a neutral pattern with no symmetry
between the trendlines and no indication
of which direction the breakout will
subsequently come.
Although the breakout will often be in
the direction of the prevailing trend,
with the price action providing little clue
to the breakout during the formation, it
cannot therefore be considered as a true
continuation pattern.

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Fig 7. An ascending triangle on the Dollar/Yen hourly chart

The Descending Triangle is the opposite of an ascending triangle and develops as a consolidation
pattern during a bearish trend. In a descending triangle, the lower trendline is flat and the upper
trendline is descending. This is generally seen as a bearish pattern where chartists look for a
downside break. The price this time has been trending lower but then encounters support which is
tested on a consistent basis. During this test of support a series of lower highs is left. The eventual
break through the support will often be characterised by a demand vacuum, where a series of stoplosses are triggered leading to a sharp decline in price. The implied target derived from the pattern
uses the downslope of the triangle, projected lower from the point of support.

Fig 8. A descending triangle on the Gold daily chart

4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Flags
A flag is a short-term continuation pattern, formed over just a few periods. Flags can be both bullish
(in an uptrend) and bearish (within a downtrend). Flags are formed on the consolidation which can
follow a sharp price movement. With a Bull Flag the consolidation can often be characterised by a
gradual drift lower which culminates in another sharp move to the upside in the same direction as
the prevailing trend.
A Bear Flag is the
opposite, with a sharp
decline followed by a
consolidation pattern
(which can often contain
a slight upside drift.
The pattern is then
completed after another
sharp price movement in
the same direction as the
move that started the
trend.
Fig 9. A Bull Flag on the S&P 500 hourly chart

Wedges
A wedge pattern is similar to a flag pattern but the period of consolidation can last a lot longer. As
with flag patterns what tends to happen is that you will get a Falling Wedge in an uptrend, which is a
bullish pattern, and a Rising Wedge in a downtrend which is a bearish pattern. The similar principles
apply as for flag patterns.
Unfortunately, just to make things a little bit more complicated, you can also get falling wedges in
a downtrend (which are usually considered to be a bearish continuation pattern) and also get rising
wedges in an uptrend (which is usually considered to be a bullish continuation pattern).

Fig 10. A Rising Wedge on FTSE 100 daily chart

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4. Discovering Multiple Period Chart Patterns

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

Range Breakouts
A Range Breakout is another trend continuation pattern. It is a consolidation phase that follows
a strong move. The consolidation is characterised by a series of highs and lows within a range that
eventually break in the direction of the prevailing trend. It is then subsequently possible to trade
in the direction of the breakout. Note how in the example of Euro/Dollar below, how there was a
pullback towards the breakout, before the trend eventually continued higher.

Fig 11. A Range Breakout on the Euro/Dollar daily chart

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

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Figure 4: Range trading using the Bollinger Bands on Silver

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