Candlesticks tell you what is happening *right now*. **Chart Patterns** tell you what might happen *next*. Patterns are simply **mass psychology** visible on a chart, showing the battle between Buyers and Sellers.
When one side wins, the price explodes. This is called a **Breakout**. This guide covers the most reliable formations to catch big moves.
SVG 1: The Psychology of a Pattern (Compression and Breakout)
1. Reversal Patterns (Warning Signs)
These patterns signal that the current trend is dying and a new trend is potentially beginning.
The Head and Shoulders (H&S)
Indicates the end of an Uptrend. The **Right Shoulder** failing to make a higher high signals **weakness** in the buying pressure.
- **Head & Shoulders:** Left Shoulder (High) -> Head (Higher High) -> Right Shoulder (Lower High).
- **Entry:** Sell when price breaks *below* the **Neckline** (The support level connecting the lows).
Double Top ("M" Pattern)
Price hits a resistance level twice and fails to break it. This shows that **buyers are exhausted**. Entry is typically a sell when price breaks the neckline support.
2. Continuation Patterns (Trading with the Trend)
These are safer to trade because you are trading *with* the prevailing trend.
The Bull Flag
Forms after a strong vertical move up (**The Pole**). Price then consolidates downwards in a tight channel (**The Flag**). This is **profit-taking**, not selling pressure.
**Entry:** Buy when price breaks the top of the flag.
SVG 2: The Bull Flag (Continuation Pattern)
3. The "Retail Trap" (Breakout Risk Avoidance)
Everyone knows these patterns, so **banks know that *you* know**. Price often breaks the neckline, triggers stops, and immediately reverses (**Fakeout**).
SVG 3: Retail Trap Avoidance (Conservative Retest Entry)
How to Avoid the Trap (The Retest Rule):
- **Aggressive Entry:** Enter immediately on the breakout candle. (**High Risk**).
- **Conservative Entry:** Wait for the breakout, then wait for price to come back and **Retest** the broken level (Neckline). If it holds as Support/Resistance, *then* enter. (**Lower Risk**).
4. Risk Management and Targets
Every trade must be mathematically justified. Patterns give you a precise entry and a **Measured Target**.
- **Measuring Targets (Profit):** For a **Head & Shoulders**, measure the distance from the Head to the Neckline and project that length from the breakout point. For a **Flag**, measure the length of the Pole and project that length from the breakout point.
- **Fixed Risk:** Always risk a fixed, small percentage (**1% to 2%** of capital). Use the Risk & Reward Calculator to validate that your measured move target provides a favorable RR.
Final Thoughts
Patterns are powerful because they simplify market chaos. However, **context is everything**. A Bull Flag at a major Resistance level is dangerous. A Bull Flag in a clear Uptrend is high-probability.
Integrate **Risk Management** and **Confirmation** to trade these patterns successfully. Monitor the market flow and pattern breakouts via the Realtime Market Dashboard.
