Chapter 3: Chart Patterns and Price Actions

What is the usual distance price moves after a break in a head and shoulders pattern?

• The distance from the high point of the head to the neckline
  Explanation: In technical analysis, the expected price movement after a break in a head and shoulders pattern is typically equal to the vertical distance from the top of the head down to the neckline. This measurement is used to project the potential price target after the pattern completes.

• The distance from the high point of the shoulder to the neckline
  Explanation: This is not the standard method for measuring the price target in a head and shoulders pattern. The shoulder is lower than the head, so this would underestimate the expected move.

• One-half the size of the head
  Explanation: There is no technical basis for using half the size of the head to estimate the price move. The full distance from the head to the neckline is the accepted approach.

What is the name of the chart pattern that occurs when a valley is formed, followed by an even lower valley, and then another valley equal to the first valley in a downtrend?

• Double Bottom
  Explanation: The Double Bottom pattern consists of two valleys at approximately the same price level, indicating a potential reversal. However, in this scenario, the middle valley is lower than the first and third, which does not fit the Double Bottom pattern.

• Falling Wedge
  Explanation: The Falling Wedge is a bullish reversal pattern formed by converging trend lines, not by three valleys as described in the question.

• Inverse head and shoulders
  Explanation: The Inverse Head and Shoulders pattern is characterized by three valleys: the middle valley (the 'head') is the lowest, flanked by two higher valleys (the 'shoulders'). This matches the scenario described in the question.

• Head and Shoulders
  Explanation: The Head and Shoulders pattern is a bearish reversal pattern with three peaks, not valleys, so it does not fit the description in the question.

What is the usual size of the move up when price breaks out to the upside in a bullish rectangle?

• One-half the size of the rectangle
  Explanation: This is not the typical measurement. While some patterns may have moves of this magnitude, the bullish rectangle usually projects a move equal to the height of the rectangle.

• About the same size of the rectangle
  Explanation: Correct. When price breaks out to the upside from a bullish rectangle, the expected move is typically about the same size as the height of the rectangle. This is a common price target used by technical analysts.

• Twice the size of the rectangle
  Explanation: This is an overestimation. The usual price target is not double the rectangle's height, but rather equal to it.

What does "bilateral" mean when talking about chart patterns?

• Are all chart patterns equal?
  Explanation: This option is incorrect. "Bilateral" does not mean that all chart patterns are equal; it refers to the potential direction of the breakout.

• Is there no bias as to where price is headed, and the breakout can be either up or down?

  
  Explanation: This is the correct answer. "Bilateral" chart patterns indicate that the price could break out in either direction, up or down, without a clear bias.

• Are there two versions, a bearish and a bullish one?

  
  Explanation: This option is incorrect. While some patterns have bullish and bearish versions, "bilateral" specifically refers to the possibility of a breakout in either direction, not the existence of two versions.

Which type of chart pattern forms when price consolidates between an upward support line and a downward resistance line?

• Wedge
  Explanation: A wedge pattern forms when price consolidates between an upward sloping support line and a downward sloping resistance line, creating a narrowing range. This pattern often signals a potential reversal or continuation depending on its direction.

• Widget
  Explanation: 'Widget' is not a recognized chart pattern in technical analysis.

• Rectangle
  Explanation: A rectangle pattern forms when price moves between horizontal support and resistance lines, not sloping ones.

• Double Top or Bottom
  Explanation: Double Top or Bottom patterns are reversal patterns formed by two peaks or troughs at similar price levels, not by converging trend lines.

What do you call chart patterns that indicate the ongoing trend will probably continue?

• Reversal
  Explanation: Reversal patterns signal that the current trend is likely to change direction, not continue.

• Bilateral
  Explanation: Bilateral patterns suggest that the price could move in either direction, making them indecisive about trend continuation.

• Continuation
  Explanation: Continuation patterns indicate that the existing trend is likely to persist, making them the correct answer for ongoing trends.

What is the usual distance price moves after a break in a head and shoulders pattern?

• One-half the size of the head
  This is not the standard measurement. The usual price target is not based on half the size of the head.

• The distance from the high point of the shoulder to the neckline
  This is not the typical method. The shoulder's high point is not used for measuring the expected move after the pattern breaks.

• The distance from the high point of the head to the neckline
  Correct. The usual price target after a break in a head and shoulders pattern is the vertical distance from the top of the head to the neckline, projected downward from the breakout point.

Which chart pattern is formed when price consolidates into a box after a downtrend? (Indicating sellers probably need to take a break before pushing the pair any lower.)

• Rising Wedge
  Explanation: A rising wedge is a bearish reversal pattern, but it forms after an uptrend, not a downtrend. It is characterized by converging trend lines as prices rise.

• Bearish Box
  Explanation: 'Bearish Box' is not a standard technical analysis term for a chart pattern. It may refer to consolidation, but the correct term is 'Bearish Rectangle.'

• Symmetrical Triangle
  Explanation: A symmetrical triangle is a consolidation pattern that can occur in any trend and does not specifically indicate a pause after a downtrend.

• Bearish Rectangle
  Explanation: A bearish rectangle forms when price consolidates sideways in a box-shaped range after a downtrend, indicating sellers are pausing before potentially continuing the move lower.

What is the interesting chart pattern you can spot on this chart?

• Head and Shoulders
  This pattern is characterized by three peaks: a higher peak (head) between two lower peaks (shoulders). It often signals a reversal from bullish to bearish trend.

• Descending Triangle
  This pattern is formed by a series of lower highs and a horizontal support line. It typically indicates a bearish continuation, suggesting that the price may break downwards after consolidating.

• Double Top
  This pattern consists of two peaks at roughly the same price level, separated by a trough. It signals a potential reversal from an uptrend to a downtrend.

• Bullish Rectangle
  This pattern is identified by price moving between parallel support and resistance levels, indicating consolidation before a potential upward breakout.

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What is the interesting chart pattern you can identify on this chart?

• Head and Shoulders Pattern

  Explanation: The Head and Shoulders pattern is a reversal pattern that forms after an uptrend, consisting of a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). It signals a potential reversal from bullish to bearish. This pattern does not match the chart shown.

• Cup and Handle Pattern

  Explanation: The Cup and Handle pattern is a bullish continuation pattern that resembles the shape of a tea cup. It is characterized by a rounded bottom (the cup) followed by a smaller consolidation (the handle) before a breakout. This pattern is not present in the chart.

• Double Top Pattern

  Explanation: The Double Top pattern is a bearish reversal pattern that forms after an uptrend, where the price reaches a high point twice with a moderate decline between the two peaks. This pattern often signals a reversal to a downtrend. The chart shows two prominent peaks, which is characteristic of a Double Top pattern.

• Ascending Triangle Pattern

  Explanation: The Ascending Triangle pattern is a bullish continuation pattern formed by a horizontal resistance line and an upward sloping support line. It typically signals a potential breakout to the upside. This pattern does not fit the chart shown.

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