Technical Analysis Fundamentals
Course overview
3. Key Chart Patterns
Head and shoulders (H&S) and double top chart patterns are used in TA to indicate potential trend reversals.
The H&S pattern consists of three peaks: a central high peak (the head) and two lesser peaks on each side (the shoulders). A neckline is created by joining the swing lows between the shoulders. If the price falls sharply below this neckline, it's considered a break-out and a potential trend reversal signal.
Double tops are a simpler pattern with two consecutive highs of roughly equal height.
Similar to H&S, a neckline is drawn to link the low point between the two peaks. A breakout occurs when the price falls below this neckline, suggesting the uptrend may be ending and that price will decline.
Inverse versions
As seen in the photos above, there are inverse versions of both H&S and double top patterns, which indicate probable trend reversals from downtrend to uptrend.
Triangles and Wedges
Triangles and wedges are simple and dependable continuation patterns, particularly on longer-term charts (1 - 3 months). The patterns are made up of converging support and resistance lines. A right-angled triangle may be formed by a sequence of lower highs that form a resistance line and bounce off a horizontal support. Using a 4-hour or daily chart, the trader may buy at the support and sell at the resistance, placing stops below the support and above the resistance.
Fibonacci
The Fibonacci sequence is a series of numbers, each of which is the sum of the number before it. Each number in the sequence is 1.618 times the previous number and 0.618 times the subsequent number. This Golden Ratio, which describes the natural proportions that maintain the balance of all elements in the universe, is also reflected in financial markets. Fibonacci retracement and expansion levels help traders establish positions at strategic points. By analysing these levels, traders can determine the extent of a pullback—typically up to the 61.8% retracement level—or detect a trend reversal, which occurs past this point.
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