Charting and Chart Patterns
What this domain tests
Charting questions test whether you can classify a formation, define its confirmation point, and project a measured target. You must also distinguish reversal from continuation patterns and know the role of volume.
Core rules
- A candlestick records open, high, low and close; the real body is open-to-close, shadows are the extremes. A long upper shadow after an advance shows rejection of higher prices, not automatically a top.
- Reversal patterns: head and shoulders, inverse head and shoulders, double/triple top and bottom, rounding bottom. Continuation patterns: triangles, flags, pennants, rectangles, cup-and-handle.
- Confirmation normally requires a close beyond the neckline or pattern boundary, preferably with above-average volume. A pattern is not complete merely because it looks symmetrical.
- Measured move: head-and-shoulders target = neckline plus or minus (head price minus neckline). Flag target is approximately flagpole height projected from breakout.
- Gaps: breakaway (on volume at a breakout), runaway/measuring (mid-trend), exhaustion (late trend, often on high volume), common (range-bound).
Worked example
A stock rallies to 120, pulls back to 110, advances to 140 (head), falls to 112, rallies to 121, then breaks 110. Neckline is about 111. Height = 140 minus 111 = 29. Downside target = 111 minus 29 = 82. The 121 right shoulder is lower than the 140 head, and the break should expand volume. If price rebounds above 121, the pattern has failed.
Traps
- Counting a pattern before the confirming close.
- Drawing the neckline through the wrong swing lows to force a target.
- Ignoring volume on breakout; low-volume breakouts fail more often.
- Assuming a measured target is a guarantee rather than a risk/reward reference.