HOLLOW POINT TRADING
What Are Chart Patterns?
Chart patterns are distinct formations created by price movements on a chart. They represent the collective psychology of market participants—the battle between buyers and sellers that creates recognizable shapes traders have studied for over a century.
Key Takeaways
- Reversal patterns signal trend changes (Head & Shoulders, Double Tops/Bottoms)
- Continuation patterns signal the existing trend will resume (Flags, Pennants)
- Bilateral patterns can break either direction (Symmetrical Triangles)
- Always wait for confirmation before trading a pattern
- Volume should increase on breakouts for validity
Head and Shoulders
The most reliable reversal pattern. Three peaks with the middle (head) higher than the two sides (shoulders). The neckline connects the lows between peaks.
📉 Bearish Signal
Target: Measure distance from head to neckline, project downward from breakout point. Stop: Above right shoulder.
Double Top & Double Bottom
Two peaks (M shape) or two troughs (W shape) at similar price levels signal trend exhaustion and potential reversal.
Triangle Patterns
Triangles form as price consolidates between converging trendlines. The direction of the breakout determines the trade.
Bull Flag & Bear Flag
Flags are continuation patterns. A sharp move (flagpole) followed by a consolidation (flag) before continuing in the original direction.
Wedge Patterns
Wedges look like triangles but both trendlines slope in the same direction. They typically signal reversals.
Rising Wedge (Bearish)
Both lines slope UP but converge. Despite higher highs, momentum weakens. Usually breaks DOWN.
Falling Wedge (Bullish)
Both lines slope DOWN but converge. Selling pressure exhausts. Usually breaks UP.
Trading Pattern Rules
Pattern Trading Checklist
- Wait for confirmation: Don't anticipate—let the pattern complete and break
- Volume confirms: Breakouts should occur on above-average volume
- Measure for targets: Height of pattern projected from breakout point
- Place stops logically: Behind the pattern's opposite side
- Context matters: Patterns work better aligned with the larger trend
- False breakouts happen: Wait for candle closes, use stop losses
Pattern Recognition Takes Practice
The more charts you study, the better you'll become at spotting patterns in real-time. Start by identifying patterns on historical charts, then practice finding them as they form.
Remember: patterns provide probabilities, not certainties. Always use proper risk management.