Chart Patterns

An Introduction to Chart Patterns

Chart patterns are considered to be classical technical analysis or the Western approach. These patterns are essential for every trader interested in charting a financial product or market. They can be both reversal or continuation patterns and the most popular are: head and shoulders, double and triple top / bottoms, triangles, wedges, etc.

The Head and Shoulders Pattern

The head and shoulders pattern consists of a spike preceded by a consolidation area on the left side (left shoulder) and one on the right side (right shoulder).

The idea is that if you take a trend line and connect the two shoulders (neckline), by the time this is broken the pattern is considered to be complete and the measured move can be traded. This represents the distance from the highest/lowest value in the spike/dip to the neckline and is projected directly from the neckline.

However, this is a reversal pattern, meaning that it appears at the end of a bullish/bearish trend. With a trend ending, a new one should start and hence the measured move is worthless.


Double and Triple Tops

Double and triple tops are also considered trend reversal patterns, though unfortunately these are remarkably rare. It is said that a triple or bottom seldom holds, so upon observing one it is likely to then be identified as the upper part of an ascending triangle.

A double top or bottom resembles the letter M (double top) or W (double bottom) and they come with a measured move as well. In this case it is considered to be the distance from the double top to the first spike/dip projected in the other direction.



Triangles come in a multitude of types and are considered to be a highly reliable tell for when the market is consolidating. Knowing how a triangle is forming and its implications will therefore insure a competitive advantage in front of the market.

A break in the lower base of the above triangle reads that the pattern is complete and a new move is starting. This triangle is considered to be a reversal pattern as the previous trend was bullish when the triangle formed and the break is now to the downside, meaning the spike higher was fake.

The most common chart pattern is a wedge and these can be either bullish or bearish. A bullish wedge is deemed a falling one and a bearish wedge is a rising one. Waiting for the wedge to be broken before trading in the other direction is the way to go.


Elliot Waves Theory

The Elliott Waves Theory prevails because the beauty is in its simplicity: five waves move up, followed by three moving down. What is there to make it complicated?

However, it is precisely this deceptive candour that makes it so difficult. Each of the five waves are formed from waves of a lower degree and of a different cycle. Unless you are both knowledgeable and thorough, mistakes can easily be made.

Elliott divided the waves into two big categories: impulsive and corrective.

An impulsive move has a five wave structure and is labelled with numbers (1-2-3-4-5). Out of those five waves, the second and the fourth are corrective, whilst the 1st, 3rd and 5th are impulsive but of a lower degree. This means that not only the whole 1-2-3-4-5 structure needs to respect all the rules of an impulsive move, but also the 1st, 3rd, and 5th as well.

For an impulsive move at least one wave should extend – most of the time this extension applies to the third wave. This means that the 3rd wave is by far the biggest of the structure, representing the moment that the market is travelling quickest and churning profits at speed. No wonder traders strive to locate its beginning!
Unfortunately, with the market consolidating a large percentage of the time, impulsive moves are infrequent and corrective waves dominate the charts.

Corrective waves are labelled with letters (A,B,C) and can be simple (triangles, flats, zigzags) or complex (double and triple zigzags, double and triple threes, double and triple flats, etc.). This is one of the most challenging aspects to consider when trading with Elliott Waves theory.

Overall, the main issue for a trader is to know where a count should start. The solution for this is to start with the biggest time frame (the monthly chart), locate a positive looking wave and then proceed with the lower time frames to locate the correct trading point. For example, whilst no one trades on the monthly chart, should a triangle be identified there with corrective waves for legs, a trader can continue into the lower time frames and trade those legs as they represent the best decision.


The Gartley Trading Method

The Gartley Trading Method shares similarities with the Elliott Waves Theory, in the sense that it refers to corrective waves as retracement levels.

To be more precise, a common corrective wave in Elliott Waves Theory is the flat pattern. In such a pattern, the B wave is supposed to retrace more than 61.8% when compared with the length of wave A. This is considered to be the minimum retracement. In one category of flat patterns, wave B is retraces between 81% and 100% and this group is extremely similar to those the Gartley Trading Method uses.

The original method is that a trader begins by locating three points (A, B and C) and waits for the last one to retrace around 80% when compared with the length of the B wave. By the time the retracement level is reached, a trade can be taken in the opposite direction with invalidation, or stop if market is moving beyond the end of point B.

Modern versions of the pattern allow a trader to effectively calculate a take profit based on the values of the previous points. A bullish scenario looks much like the following example:

The most important aspect to consider when trading with the Gartley method, is that a stop loss is always needed. In the case of trading binary options, an invalidation level is required as the whole setup is considered fake and worth leaving alone if the market travels beyond this specific level.

Nowadays there are plenty of trading indicators available on the market (either for free or at cost) for identifying bullish or bearish Gartley patterns, with a specific take profit and stop loss level. However, I’d like to stress the importance of the type of market you are hoping to analyze this with. For example, if you’re looking for an 80% retracement and on an FX market, whilst this type might be common it doesn’t mean the Gartley method works.

In actuality, most of the time when the market is retracing, it is in a corrective manner – stopping everyone and the whole previous action, only for quick reversal, invalidating the move.

If everyone made correct moves there would be only winners, which we all know it is not the case – so doing your research earnestly is a must. In short, chart patterns are perpetually formed. They are indispensable to traders, and knowing how to distinguish one ahead of the time can result in lucrative trading moves.