the hAnDbook of teChniCAl AnAlysisfrom the breakout point. This also corresponds to the reward‐risk ratio setup for a
trade based on a chart pattern. The one‐to‐one, two‐to‐one, and three‐to‐one pro-
jections are popular profit‐taking levels and the practitioner should treat these levels
as potential reversal levels. These hidden profit‐taking levels also represent barriers
to price action of which most novice traders are totally unaware when trading chart
patterns. In some chart formations like the flag and pennant, the height of the pole
is used for the determination of minimum price objectives or targets.
pattern Completion
Chart patterns are usually considered complete or confirmed when one of the fol-
lowing five scenarios occurs:
- Price breaches a level associated with a significant inflection point with respect
to the chart pattern. - Price breaches a trendline associated with the chart pattern.
- A minimum number of significant price inflection points are formed.
- A price gap is formed.
- The formation is visually discernible.
For example, chart patterns that require a breach of a price level associated
with a significant inflection point in order to be considered as complete or con-
firmed include:
■ (^) Double tops and bottoms: The breach of a price level associated with a signifi-
cant price inflection point between the two peaks in a double top or two troughs
in a double bottom completes the pattern. See Figures 13.14 and 13.15.
■ (^) Triple and multiple tops and bottoms: The breach of significant price inflection
points between triple and multiple peaks in a topping formation or triple and mul-
tiple troughs in a bottoming formation completes the pattern. See Figure 13.19.
■ (^) Rounding tops and bottoms: A breach of the previous significant peak in a
rounding bottom formation or breach of the previous significant trough in a
rounding top formation completes the pattern.
Chart patterns that require a breach of a trendline in order to be consid-
ered complete or confirmed include standard and inverted head and shoulders
patterns. A breach of the head and shoulders neckline completes the pattern. See
Figures 13.4 and 13.5.
Chart patterns that require a minimum number of significant price inflection
points to be formed in order to be considered complete or confirmed include any
chart pattern that is formed by two (or four) trendlines, such as:
■ (^) Expanding (broadening) and contracting triangles which include ascending,
descending, and symmetrical triangles
■ (^) Rising, falling, and horizontal channels
■ (^) Wedges
■ (^) Pennants