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Identifying Chart Patterns

with Technical Analysis

BROKERAGE: TECHNICAL ANALYSIS

 Getting Started with Technical Analysis
Learn the assumptions that guide technical analysis, and get to
know the basics of trend trading.

Understanding Indicators in Technical Analysis

Identify the various types of technical indicators, including trend,
momentum, volume, volatility, and support and resistance.

Technical Identifying Chart Patterns with Technical Analysis

Analysis Use charts and learn chart patterns through specific examples of

Webinar
important patterns in bar and candlestick charts.

Series Managing Risk with Technical Analysis

Manage your trading risk with a range of confirmation methods.

1
 Charles D. Kirkpatrick II, CMT
Charles D. Kirkpatrick II, CMT, is president of Kirkpatrick & Company, Inc., a technical
analysis research firm that publishes the Market Strategist investment newsletter. A
past instructor in finance at the School of Business Administration at Fort Lewis College
and adjunct professor of finance at Brandeis University International Business School,
he is a two-time winner of the Chartered Market Technicians Association’s prestigious
Charles H. Dow Award for research in technical analysis, winner of the MTA Annual
Award in 2008 for “Outstanding Contributions to the Field of Technical Analysis,” and
winner in 2012 of the Mike Epstein Award from the MTA Educational Foundation for
“Long-Term sponsorship of Technical Analysis in Academia.”

About Our He is a Chartered Market Technician, a past member of the board of directors of the
Market Technicians Association, past editor of the Journal of Technical Analysis, past

Coauthor
board member and vice president of the CMT Association Educational Foundation and
a member of the American Association of Professional Technicians (AAPTA). He
coauthored Technical Analysis: The Complete Source for Financial Market Technicians,
the primary textbook for the CMT program and for university graduate courses on
technical analysis, authored Beat the Market and, most recently, Time the Markets:
Using Technical Analysis to Interpret Economic Data.

He is a graduate of Phillips Exeter Academy, Harvard College (AB), and the Wharton
School (MBA) and lives with his wife in Maine.

2
BROKERAGE: TECHNICAL ANALYSIS

Techniques for
Trading Patterns

Understanding Construction
Patterns and of Common
Their Limits Chart Patterns

Agenda

3
Understanding
Patterns and
Their Limits
BROKERAGE: TECHNICAL

Defining Patterns

• A pattern is bounded by at least two trend lines (straight or curved)

• All patterns have a combination of entry and exit points

• Patterns can be continuation patterns or reversal patterns

• Patterns are fractal, meaning that they can be seen in any charting
period (weekly, daily, minute, etc.)

• A pattern is not complete or activated until an actual breakout occurs

BROKERAGE: TECHNICAL

The Limits of Patterns

Keep in Mind
Some of our human tendencies can be
dangerous for investors.
• See patterns where there aren’t any

• Believe “market lore,” technical and fundamental, without evidence

• Look backwards rather than forward

• Stick with original price targets of patterns after conditions have

changed
Techniques for
Trading Patterns
BROKERAGE: TECHNICAL

Techniques for Trading Patterns

• Breakouts
• Entry Stops
• Protective Stops
• Retracements
BROKERAGE: TECHNICAL

Breakouts

Violation of Trend Line,

Support or Resistance, or
previous reversal point

It signifies that a change Resistance Breakout

in buyer and seller
behavior and signals
the beginning or end
of a trend.

Price
 BROKERAGE: TECHNICAL

Confirmation Filters

Types of Filters
Confirmation Filters
• Intrabar
Apply a confirmation filter to determine whether a breakout has taken place.
• Multiple closes

• Time

• Percentage or point

• Money

1
BROKERAGE: TECHNICAL

Entry Stops

Entry Stops
Buy stop orders are used to
enter trades once the price
breaks out.

Resistance Breakout

Trend Line Breakout

BROKERAGE: TECHNICAL

False and Failed Breakouts

False Breakout
Breakout
False Breakout (return
Price breaks out but almost Resistance
Failed Line
Breakout through breakout level)
immediately returns back
through its breakout price.

Failed Breakout
(Trap)
Trend Line
False breakout occurs and
the price then breaks out in
the opposite direction.
BROKERAGE: TECHNICAL

Protective Stops

Protects Capital
Determines the amount of
capital risk before entry
Breakout
Types of Resistance Line

placement
Protective Stop
• Filters, such as percent,
points, or money

• Trend line, support or

resistance level with filter
BROKERAGE: TECHNICAL

Trading False Breakouts Using Protective Stops

Example
False Breakout Protective sell stop and sell
• Enter on breakout short entry stop

• Place protective stop

outside breakout bar
opposite from breakout
direction

• Place entry stop at same

level (called a “stop and Failure
reverse” order)

• If price continues in
direction of breakout, profit
from breakout entry

• If breakout is false, profit

from stop and reverse
BROKERAGE: TECHNICAL

Retracements

Counter Trend
Correction Retracement (pullback)

Types
• Pullback (on breakout down)
• Throwback (on breakout up) Trend Line Breakout

Waiting for
• Don’t always occur
• Performance can suffer
when they do
Construction of
Common Chart
Patterns
BROKERAGE: TECHNICAL

Common Chart Patterns

Multi-Bar Candlestick Short-Term

Patterns Patterns Patterns
Horizontal Congestion
• Doji • Pennant/Flag
• Double and Triple
• Harami • Gaps
Tops/Bottoms
• Hanging Man/Hammer • Pipe Bottom
• Rectangles
• Shooting Star/Inverted • Narrow Range
Triangles Hammer
• Engulfing
• Symmetrical
• Dark Cloud/Piercing
• Ascending and Descending
• Wedges

Other
• Head and Shoulders
• Cup and Handle
BROKERAGE: TECHNICAL

Horizontal Congestion: Double Top

Characteristics: Double Top

Double Top
• Two successive peaks (breakout down)
separated by an opposite
reversal point Resistance Line

• Either rounded or pointed peaks

that are usually at roughly the same Entry Pullback
price (resistance level) Breakout

Support Line
• Price must break out of middle Breakout

reversal point

Price

Calculate target price:

Taking the height from the highest peak to the trough and
then subtracting the amount from the breakout price to
the downside.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Horizontal Congestion: Double Bottom

Characteristics: Double Bottom

• Two successive troughs separated (breakout up)
by a peak
Breakout
Breakout
• Either rounded or pointed troughs Resistance line
that are usually at roughly the same
price (support level)
Entry
Throwback
• Price must break out of Double Bottom
middle peak
Support line
Price

Calculate target price:

Taking the distance from the troughs to the peak and
then adding that amount from the breakout price to the
upside.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
 BROKERAGE: TECHNICAL

Horizontal Congestion: Triple Top

Characteristics: Triple Top

• Three distinct peaks at roughly the (breakout down)
Tripl
same price level separated by two e
Top
intermittent troughs Resistance line

• Breakout occurs when price Pullback

exceeds the extreme of the
intermittent trough or a trend line Breakout
connecting those points Support line
Entry Breakout
Price

Calculate target price:

Take the height from the highest peak to the lowest
trough in the pattern. Then subtract that amount from the
lowest trough in the pattern to generate a price target.

20
Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd ed.
*
BROKERAGE: TECHNICAL

Horizontal Congestion: Triple Bottom

Characteristics: Triple Bottom

• Three distinct troughs at roughly the (breakout up)
same price level separated by two
intermittent peaks at any level Entry Breakout
Breakout
• Breakout occurs when price exceeds Resistance line
the extreme of the intermittent peaks
or a trend line connecting those
points Throwback

Triple
Bottom
• Best performance may be after a Support line Price
sustained decline*

• An average performance, but watch

for failures* Calculate target price:
Take the height from the highest peak to the lowest
trough in the pattern. Then add that amount to the
highest peak in the pattern to generate a price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Horizontal Congestion: Rectangles

Characteristics: Rectangle
• Trading range with support and (entry up, breakout up) Resistance Zone
resistance levels bounding price
action Entry Throwback
Support Zone
Shortfall Breakout
• Slight tilt, similar to horizontal Breakout
channel Resistance line

• Often has many false breakouts*

Support line
• Things to consider: Price
‐ Confirm a breakout
‐ “Shortfall” often indicator of eventual
breakout direction
Calculate target price:
• Best occurrence may be bottom Take the height from the resistance line to the support line. Then
breaking upward* either add that amount to the resistance line to generate a price
target for an upside breakout, OR subtract that amount from the
support line to generate a price target for a downside breakout.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Triangle: Symmetrical

Characteristics: Symmetrical Triangle

• Bounded by a downward sloping (breakout up)
upper trend line and an upward
sloping lower trend line. Each bound Throwback
is a straight trend line Breakout

• Prices must touch each bound at Target Line

least twice. Many false breakouts. Entry
Moderately successful in
performance Cradle
Price
• Things to consider:
‐ Confirm a breakout

• Best occurrence may be upward Calculate target price:

breaking out – above average for
all patterns* Take the height from the highest peak in the pattern to the
lowest trough in the pattern. Then either add it (for upward
breakouts) to the breakout price or subtract it (for downward
breakouts) from the breakout price to generate a price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Triangle: Ascending

Characteristics: Ascending Triangle

• Bounded by a horizontal upper trend (breakout down)
line and an upward sloping lower Pullback
Resistance line
trend line. Each bound is a straight
trend line Target Line
Entry

• Prices can break in either direction,

but more commonly upward*
Support line
Uptrend Line Breakout
• Breakout usually occurs in pattern.
About average failure rates but many Price
small false breakouts*

• Post breakout performance average

on upside but above average on Calculate target price:
downside* Take the height from the highest peak in the pattern to the
lowest trough in the pattern. Then either add it (for upward
breakouts) to the breakout price or subtract it (for downward
breakouts) from the breakout price to generate a price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
 BROKERAGE: TECHNICAL

Triangle: Descending

Characteristics: Descending Triangle

• Bounded by two trend lines; the (breakout down)
lower is horizontal and the upper
slopes downward Resistance line
Downtrend Line
Pullback
• Prices can break in either direction Entry
but most commonly downward*
Support line
• Above-average performance on Breakout Breakout Down
upside break; retracements occur
often* Price

Calculate target price:

Take the height from the highest peak in the pattern to the
lowest trough in the pattern. Then either add it (for upward
breakouts) to the breakout price or subtract it (for downward
breakouts) from the breakout price to generate a price
target.

25
*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd ed.
 BROKERAGE: TECHNICAL

Triangle: Wedge

Characteristics: Rising Wedge

• Bounded by two trend lines, each (breakout down from climax peak)
headed in the same direction; Price Climax
must touch a trend line at least five Pullback
times (3 times on one and 2 times on
the other) before a breakout
Breakout
• Often occur following a
panic (declining wedge) or
Entry
bubble (rising wedge)
Price
• Performance in both types is below
average, and retracements are
very common* Calculate target price:
For downward breakout, the lowest trough in the pattern is the
price target. For upward breakouts, take the height from the
highest peak in the pattern to the lowest trough in the pattern
and add that amount to the breakout price for a price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd ed.
26
 BROKERAGE: TECHNICAL

Head and Shoulders: Top

Characteristics: Head

• Three peaks with center peak higher

than the other two
Left Shoulder
Right Shoulder
Breakout
• Shoulders should be at approximately
the same level and the head higher

• Line connecting the two throughs

between the peaks is called Neckline
the “neckline”

• Pattern is only complete on breaking

the neckline Target

• Target is the distance from the head to

the neckline projected from the neckline

• This is a standard pattern for tops and

has one of the lowest failure rates

27 *Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd ed.
BROKERAGE: TECHNICAL

Head and Shoulders: Bottom (Inverse)

Characteristics:
• Inverted but otherwise
Head and Shoulders Bottom
identical to a top pattern
(breakout up)
except not as profitable*
Price

Breakout
Breakout
Neckline

Neckline
Entry Throwback

Left Shoulder Right Shoulder

Left Shoulder
Right
Head Shoulder
Head

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Cup and Handle (also “Saucer”)

Characteristics: Rounding Bottom

• Pattern consists of a rounded bottom (breakout up)
(not a “V” bottom), two “lips” at each Price Breakout
end, and a “handle” (similar to a flag Breakout
Entry
pattern) from the handle Lip

• Pattern is complete with breakout Lip

above both lips Throwback
e
• Often have a throwback Handle
D
Cup or
Bowl
• The pattern’s performance ranks
about average for bottom patterns*

Calculate target price:

Take the height of the right cup lip to the bottom of the
cup, then add that amount to the breakout price.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Trading with Patterns

Wedge
= Buy

= Stop Wedge

= Exit
Triangle

Triangle

Rectangle

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd ed.
BROKERAGE: TECHNICAL

Best Multi-Bar Patterns

Upward Signals Downward Signals

• Descendin • Flag
g Triangle
• Head and
• Rectangle Shoulders top
• Pipe Bottom • Island Reversal
BROKERAGE: TECHNICAL

General Information about a Candlestick

Characteristics:
• Traditionally, candlestick patterns are reversal patterns, meaning they
are used to identify when a trend is ending

• Candlestick patterns are often used with longer-term trends, thus,

upward reversal patterns after a correction in a longer upward trend
show the best performance, and vice versa for downward reversal
patterns in a long downward trend

• Be careful not to act on a perceived candle pattern until the pattern

has formed and is activated by a breakout in a certain direction
BROKERAGE: TECHNICAL

Doji

Characteristics: Doji
• A one-candle pattern formed when the open
and close are the same price, and the high
and low are roughly equidistant from the open
and close

• Extremely common

• Indicates indecision in the marketplace and

thus is a possible warning of price change

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Harami

Characteristics: Harami

• A two-candle pattern of a large body of either Top Bottom

color followed by a small body of the
opposite color; The second body is completely
within the body of the large body and is called
a “spinning top”

• Although common belief is that the harami is

a reversal pattern, many report that is has the
potential of breaking either way

• A variation that has a doji instead of a spinning

top as the second candle has equally average
performance and random breakout*
Candle body can
be Black or White

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Hanging Man and Hammer

Characteristics: Hanging Man — Hammer

• One-candle patterns differentiated by the color Top Bottom

of the body. Each pattern has a high that
coincides with either the opening or closing
price

• Hanging man, thought to be a continuation

pattern, actually breaks in either direction
randomly with a slight upward bias. Its overall
performance is below average*

• Hammers occur relatively frequently but have

below-average performance*

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Shooting Star and Inverted Hammer

Characteristics: Shooting Star and

Inverted Hammer
• A one-candle inverted hanging man or hammer Top Bottom
pattern. Hammers by themselves have white
bodies and shooting stars have black bodies

• As a one-candle pattern, the shooting star has

average performance. The same is true for the Either Can Be Black or White
single inverted hammer*

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Engulfing

Characteristics: Engulfing

• A two-bar pattern in which the second bar Top Bottom

body completely engulfs the first bar body*

• A bottom engulfing pattern, with a short black

body followed by a tall white body, is thought
to be an upward reversal pattern and actually
has very good performance on a downward
breakout in a downward trend*

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Dark Cloud Cover and Piercing Line

Characteristics: Dark Cloud Cover

and Piercing Line
Top Bottom
• The dark cloud cover is a two-bar pattern where
the second bar closes higher than the first and
is black versus white in the first bar

• The piercing line is the opposite of the dark

cloud cover in that the second bar is white and
lower than the first bar which is black

• The dark cloud is thought to be a downward

reversing pattern

• The piercing line pattern is thought to be an

upward reversing pattern*

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Pennant/Flag

Characteristics:
• Pennant and flag patterns are Flag and Pennant
in upward trend Flag Pennant
variations of the same pattern

• These patterns are often preceded by

a steep, sharp price change, up or
down, and form a short consolidation Price
that appears like a triangle or flag.
Generally, the pattern slopes slightly
in the direction opposite from the
trend

• The breakout in either direction is

often followed by a move that equals Calculate target price:
the earlier steep, sharp price change Take the height from the start of the "flag pole” to the
into the pattern highest peak in the pennant. Add that amount to the
bottom of the pennant for an upward price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Gap

Characteristics
• Definition – no trading (gap)
at specific prices

• Gaps can be considered

“up” or “down”
Gap Up
• Gaps are caused by
appreciable changes
in supply and demand
from one close to the
following open

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Gap

Characteristics
• Gaps are generally profitable on
breakouts from patterns, trends,
support or resistance

• A method of trading a gap is the

“explosion gap pivot.” It assures
that the gap is valid Breakout

• After the gap, wait for

“throwback.” If throwback “covers”
the gap, no action. If the
throwback stops, this is called the
“pivot low.” Place buy entry above
high of the gap bar

• “Pivot” is the lowest level of the Gap Pivot

Pivot Low

post-gap breakout

• Protective stops initially placed at

gap low and then below pivot low

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Two-Bar Reversal Button or Pipe Bottom

Two-Day Reversal Bottom (or Pipe Bottom)
Characteristics:
• Two bars and occurs at the end of a large
trend, up or down trend. Ideally, the first bar,
in a bottom pattern, closes at the low, and the
second bar closes in the upper half of the range.
It is more reliable in weekly data

• Bar ranges are larger than preceding

bar ranges

• Action occurs on breakout through second bar

Calculate target price:

Take the height from the taller of the two bars to the
lower of the two bars. Add that amount to the taller of the
two bars to get a price target.

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Volatility Patterns

Characteristics: Inside Bar

• Dull activity is known as “low volatility.” New Buy next bar at opening above inside bar close
trends often begin from periods of low volatility

• One way to look at volatility is to observe the

relationship between price bars

• “Range” is the spread between high and low in

a price bar

• If a bar is followed by a bar with less range,

volatility is declining; the second bar is called a Sell next bar at opening below inside bar close
“narrow range” bar

• When this second bar’s range is contained

within the range of its preceding bar, it is called
an “inside bar.”

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
BROKERAGE: TECHNICAL

Narrow Range

Characteristics: NR4
• One low volatility pattern is called a “Narrow Range on day 4 less than days 1-3
Range” pattern and consists of a bar with a
range narrower than its preceding bars

• The graph shows a four-bar, Narrow Range

pattern (NR4) with four bars, the fourth bar
having a narrower range than the preceding Buy

three bars

• The breakout occurs on a break above or below

the high or low of the narrow range

Sell

*Source: Technical Analysis: the Complete Resource for Financial Market Technicians, 2nd
 Getting Started with Technical Analysis
Learn the assumptions that guide technical analysis, and get to
know the basics of trend trading.

Understanding Indicators in Technical Analysis

Identify the various types of technical indicators including, trend,
momentum, volume, and support and resistance.

Technical Identifying Chart Patterns with Technical Analysis

Analysis Use charts and learn chart patterns through specific examples of

Webinar
important patterns in bar and candlestick charts.

Series Managing Risk with Technical Analysis

Manage your trading risk with a range of confirmation methods.

45
 Visit the Fidelity
Learning Center

Learn more about

putting technical
analysis to work
for you

Read: Access the Technical Indicator Guide

Watch: Check out videos that define core

technical concepts

Attend: Register for monthly webinars

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BROKERAGE: TECHNICAL ANALYSIS

Important Information
Any screenshots, charts, or company trading symbols mentioned are provided for illustrative purposes only and should not be considered
an offer to sell, a solicitation of an offer to buy, or a recommendation for the security.

Investing involves risk, including risk of loss.

Past performance is no guarantee of future results

Stop loss orders do not guarantee the execution price you will receive and have additional risks that may be compounded in pe riods of
market volatility. Stop loss orders could be triggered by price swings and could result in an execution well below your trigg er price.

Trailing stop orders may have increased risks due to their reliance on trigger pricing, which may be compounded in periods of market
volatility, as well as market data and other internal and external system factors. Trailing stop orders are held on a separat e, internal order
file, place on a "not held" basis and only monitored between 9:30 AM and 4:00 PM Eastern.

Technical analysis focuses on market action – specifically, volume and price. Technical analysis is only one approach to analyzing stocks.
When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments,
you must make your own determination as to whether an investment in any particular security or securities is right for you based on your
investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

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