Chart Patterns — Head & Shoulders, Triangles, Flags, and More

Chart patterns are formations created by price movements on a chart that technical analysts use to predict future price direction. They are divided into two categories: reversal patterns (signal a trend change) and continuation patterns (signal the trend will resume after a pause). Understanding these patterns gives you an edge in anticipating major price moves.

Head and Shoulders is the most well-known reversal pattern. It consists of three peaks: a left shoulder, a higher head, and a right shoulder at roughly the same level as the left. The "neckline" connects the lows between the peaks. A breakout below the neckline confirms the pattern and projects a downside target equal to the distance from the head to the neckline. Volume typically decreases on the right shoulder and increases on the neckline break. Inverse Head and Shoulders is the bullish version, forming at market bottoms.

Double Top and Double Bottom patterns form when price tests a level twice and fails to break through. A Double Top resembles the letter "M" — price rises to a resistance level, pulls back, rises to the same level again, then declines. The pattern is confirmed when price breaks below the middle trough. The target is the height of the pattern projected downward. Double Bottom resembles "W" — the bullish mirror image at support. These patterns are most reliable when the two peaks/troughs are at similar but not identical levels, separated by at least a few weeks.

Triangle patterns are continuation patterns that show contracting price ranges. Ascending Triangle: flat upper resistance with rising lower support — bullish bias, as buyers are getting more aggressive. Descending Triangle: flat lower support with falling upper resistance — bearish bias. Symmetrical Triangle: converging support and resistance with no clear bias — the breakout direction determines the move. All triangle breakouts should be confirmed by volume expansion. The target is typically the widest part of the triangle projected from the breakout point.

Flags and Pennants are short-term continuation patterns. A Flag is a small rectangular consolidation that slopes against the prior trend — a bull flag slopes downward, a bear flag slopes upward. Flags typically form over 1-3 weeks and break in the direction of the prior trend. Pennants are similar but converge to a point (like a small symmetrical triangle). Both patterns should be preceded by a sharp price move (the "flagpole"). The target is the length of the flagpole projected from the breakout.

Wedge patterns are similar to triangles but both trendlines slope in the same direction. Rising Wedge: both support and resistance slope upward, but support rises faster, creating a narrowing range — this is bearish, as it suggests weakening upward momentum. Falling Wedge: both lines slope downward, with resistance falling faster — this is bullish. Cup and Handle is a bullish continuation pattern resembling a tea cup. The "cup" is a U-shaped recess, and the "handle" is a small downward drift before the breakout. The pattern can take weeks to months to form and is very reliable when the cup is rounded (not V-shaped).

Pattern trading rules for the Egyptian market: (1) Always wait for confirmation — a pattern is not complete until the breakout occurs. (2) Volume is critical for pattern validation, especially on breakouts. (3) Measure the pattern height to set your price target. (4) Place stops on the other side of the pattern. (5) In the EGX, chart patterns work well on daily and weekly timeframes. (6) Be wary of patterns in low-liquidity stocks where false breakouts are more common. (7) The most reliable patterns form over weeks or months, not days. This is not financial advice.