As the name describes, this pattern comprises a number of peaks which each peak successively higher than the last. A line is drawn along the top of each peak to show that they are moving progressively higher. This chart pattern is used to measure the price variations in a stock over a given period of time.
This chart pattern consists of two peaks that are equal height. A line is drawn along the bottom of the pattern (the neckline or support line) – once the pattern moves downward and breaks through the support line it is considered to be a double top. When this occurs the support line becomes the resistance line.
Head & Shoulders
The head and shoulders pattern is used across the many different charting methods and consists of three peaks. The centre peak, or head, is slightly the outer two peaks or shoulders. The line joining the bottoms of the two shoulders is called the neckline. Due to market forces, the neckline is rarely symmetrical or perfectly horizontal.
This chart pattern is characterised by a breakout below the neckline. Traders and analysts will often wait until the pattern is confirmed by a number of trades below the neckline as markets can gain momentum and move back over the neckline. If the pattern does move back over the neckline then it is not a head and shoulders pattern.
Once the pattern is confirmed the neckline becomes the line of resistance, i.e. it is the upper level that the stock will move up to before moving in a downward direction.
A triple top is similar to a head and shoulders pattern however the three peaks are at relatively the same level. A line drawn along the three peaks is the resistance line and the line drawn along the bottom of the pattern is the neckline or support line. When the pattern breaks out below the neckline, the neckline then becomes the resistance line with the stock then trading beneath this line.