To The Moon

Speaker: K-Yong Kan, Investment Representative at Tiger Brokers, explains that the long list of chart patterns really comes down to three families, and how to judge each one by where it forms, what confirms it and where its potential target sits.

[About the Speaker] K-Yong Kan is an Investment Representative at Tiger Brokers who built the Trading 101 series to help clients learn trading and investing step by step. This is the second of four recaps from Part 2a, Chart Patterns & Candlesticks.

[The Hook] Double top, bull flag, cup and handle... the names can make charts feel like a foreign language. K-Yong's reassurance: it may sound like a lot, but there are really only three groups of chart patterns, and all of them come from one thing, which is how the crowd's behaviour consolidates on a chart.

[Why Patterns Exist: Crowds Move in Waves]

Before the patterns, K-Yong introduced Ralph Nelson Elliott, who documented in the 1930s that price trends tend to move in waves. The idea is that people behave in waves when many of them act together, much like a crowd moving through a venue. K-Yong's caveat: it applies to general trends and bigger timeframes, and it doesn't hold 100% of the time, but it is still worth knowing because market behaviour keeps moving in waves.

Chart patterns are how that behaviour consolidates. They form the basis of trading setups, which is what traders look at when deciding to enter or exit a position.

[Family 1: Reversal Patterns]

Reversal patterns hint that a trend may reverse soon. To be valid, they need two things: they should appear towards the end of a trend (up or down), and they need confirmation, meaning price breaks past a key point such as the neckline. In a ranging market they may still work sometimes, but they are a weaker signal.

• Patterns that end an uptrend: Double Top, Head & Shoulders, Rising Wedge.

• Patterns that end a downtrend: Double Bottom, Inverse Head & Shoulders, Falling Wedge.

(The slides label these "bullish" and "bearish" reversals. K-Yong explained that the label refers to the reversal of a bullish or bearish trend.)

Each pattern comes with a measuring rule for its potential profit zone: for a Double Top it is the height from the top zone to the neckline, for Head & Shoulders it is the height from the head to the neckline, and for a wedge it is the reversal of the move that came before. Some traders place a stop halfway through the pattern's height to keep a reasonable risk-reward ratio. K-Yong was clear that this is only a general guideline: it depends on your trading style and on what you trade, since some instruments respect these measurements more than others. He also noted that a Rising Wedge may be a weaker reversal signal today than a Head & Shoulders or Double Top, depending on what you trade.

[Family 2: Continuation Patterns]

Continuation patterns tell you the trend is still valid and is simply pausing, trading sideways or correcting, before it carries on up or down. K-Yong's everyday example: in the first minutes after a market opens, price often moves one way, pulls back a little, and traders ask whether it will continue or reverse. That small pullback is the simplest continuation pattern. The bigger ones are:

• Bull flags (wedge, rectangle or pennant): the potential profit zone is the size of the wedge, the size of the rectangle, or the height of the pennant's mast. Bear flags are the mirror image.

• Cup & Handle: a longer consolidation that forms after a retracement, typically after a failed change of trend. It works best on longer timeframes, and its handle is itself a flag. The projected profit zone is the depth of the cup, measured after a confirmed breakout from the handle. The Inverse Cup & Handle is the bearish version.

Two details worth remembering. First, location changes meaning: a falling wedge at the bottom of a downtrend is a reversal pattern, while the same shape inside an uptrend is a continuation. Second, if price breaks the wedge's support, the setup is invalid. Because support and resistance are zones, leave some allowance rather than cutting exactly on the line.

[Family 3: Bidirectional Patterns]

Bidirectional patterns, mainly triangles (ascending, descending and symmetrical), tell you a breakout or breakdown is likely but not which way. K-Yong called these the trickiest family: they need more attention and management, and you should plan for both the upside and the downside scenario. The potential profit target is the height of the triangle, and this applies to almost all triangle patterns.

[Useful Tips]

• Patterns look different on different chart types. Line charts make them easiest to see, but learn to spot them on candlestick and bar charts too, where you can also watch volatility. A line chart only updates with closing prices, so it can hide detail.

• If you can't tell the overall direction, or each timeframe shows a different pattern, sometimes the right trade is no trade. K-Yong's reminder: just like zero is a number, not trading is also a decision.

[Key Takeaways]

• Three families, not dozens of mysteries. Reversal, continuation and bidirectional.

• Location and confirmation matter. A reversal pattern needs to sit near the end of a trend and be confirmed.

• Every pattern has a measuring rule. Treat the target as a guideline, not a promise.

• No clear picture, no trade. Waiting is a valid choice.

[Call to Action 🎯]

1. Open a line chart of a stock you follow and look for one pattern. Which of the three families does it belong to?

2. Write down where confirmation would come and where the idea would be invalid.

3. Drop a comment: which pattern do you find hardest to spot?