Getting Started with Technical Analysis | Lesson 7

Hello, everyone, and welcome to Schwab Coaching. My name is Cameron May. I'm a senior manager here at Schwab, also an education coach, and this is Getting Started with Technical Analysis. And today, we're moving on to lesson seven in our intended series of eight lessons to introduce a brand new technical trader to the world of using charts for planning trades. And today, we're talking about price patterns. Now, this goes right to, it cuts right to the heart, I think, of just about the most common question that a new trader might have for themselves when they think about stock charts. They might think, 'I wonder if I studied the way stocks have behaved in the past, just looked at potential patterns in price, could that inform what I might expect the price to do in the future?

That's exactly the discipline known as price patterns. That's what they attempt to address. Of course, it's never a guarantee, but it still makes for a very interesting discussion. We'll get to the particulars of it in just a moment. But before we do that, let me first of all say hello to everybody. It's already chatting in out there in chats and in YouTube. Hello there, Michelle and Will, Kevin, Speak Truth, Charles, Robert, Rice Bird, everybody else.' Thanks for joining us week after week. We always do appreciate your attendance and your contributions to these discussions. If you're here for the very first time, I want to welcome you as well. And if you're watching on the YouTube archive after the fact, enjoy the presentation, but be aware that you're invited to join us in a live discussion.

This one kicks off promptly at 2 Eastern on Tuesdays. We'd love to have you here. And I also want to give you the heads up that my very good friend, I've been working with him now for a couple of decades, Scott Thompson's going to be hanging out in the chats. Scott's gonna be addressing any questions that I can't get to just during the flow of the presentation. Thanks for being there, Scott. And I'd also like to issue an invitation to you to follow us on X. You can follow me at CameronMayCS. Scott, do you want me to promote you? Follow Scott at ScottThompsonCS. I'd have to double-check anyway, thanks for being there, Scott. Always appreciate it. But let's get right into this discussion of price patterns.

And as we do, of course, we have to pause and consider the risks associated with investing. Risks are real, so bear these disclosures in mind. The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern, and investment strategy. While this webcast discusses technical analysis, other approaches, including fundamental analysis, may assert very different views. Schwab does not recommend the use of technical analysis as a sole means of investment research. Investing involves risks, including the loss of principal. And of course, even though we're going to be studying history, past performance of any security or strategy does not guarantee future results or success. So here's where we've been over the last seven weeks in this eight-lesson series.

Started off with just a basic introduction to technical analysis, worked through the first six lessons, bringing us today to that discussion of price patterns; we're gonna wrap it up next time with building an investing plan, a set of rules to govern one's approach to trading. But for today, the agenda has three items. First thing is we wanna discuss just what these price patterns are, a general definition of price patterns. Then we're actually going to get into examples of several different types of price patterns. We're actually going to be going through six. We're gonna be talking about bullish patterns and bearish patterns. This is not a comprehensive list, but I wanna provide a very good introduction. And I want to include in that, not just the theory of what these might look like, but go out to the Thinkorswim desktop platform and attach the theory of trading price patterns to current stock examples.

So we're gonna look at examples on some charts on Thinkorswim desktop. So let's get right into what are price patterns. So price patterns occur on a chart because horizontally, horizontally, horizontally, horizontally, and diagonal support and resistance can sometimes come together to form shapes in price, rectangles, triangles, wedges, but it's really the fundamental underpinnings of price patterns is a trader is just leaning into their understanding of price floors and price ceilings, identifying support and resistance levels. And those can lead to these patterns that we're gonna be discussing. But for each of those, they're gonna have their own specific construction, how they're identified on a chart, chart. Each pattern has a unique construction that forms over a given timeframe, and I do get questions about, well, which timeframe?

You're going to see me using daily candles on a yearly chart to illustrate these concepts today. But yes, some traders do use this approach to trading on other timeframes, hourly charts, minute-by-minute charts, weekly charts, even monthly charts. So, yes, this is one of those technical techniques that is transportable from one timeframe to another. But each pattern has a unique construction that forms over a given timeframe. Each pattern can generate its own specific entry signals, and each pattern can deliver guidelines for establishing what we call a price target. So regarding timeframes, just a quick reminder here that price patterns can appear. In any timeframe, short, intermediate, or long-term, we're going to be kind of staying in that sort of intermediate range using daily candles. But do bear in mind that you have the same concept.

So we might pick up here on daily candles might be moved to an hourly or to a weekly chart. But regarding the signals, patterns can generate entry and exit signals. So when to get in and when to get out, and I don't know about you, but to me, that's sort of a four-part question. So we're going to have a whole round trip, quite a complete plan for trading stocks. And can they be used for other things? Yep, I'm going to be using stocks anyway. But some patterns can generate entry and exit signals for swing and trend tradings, while other patterns can even identify when a stock seems to be reversing from an established trend. So we're going to make trend identification a key element in the discussion of price patterns.

And we're going to have a whole round trip, quite a complete plan for trading stocks. So we're going to be talking about what we call continuation patterns, which are patterns that when they appear on a chart, they actually can cause the trader to lean toward, okay, it looks like this stock is just going to continue moving in the direction that it's had either up or down. But there's another category of price patterns that may signal that a trend is reversing. And those are known generically as reversal patterns. And finally, price patterns can establish for a trader what we call a target. That is, when we've identified the pattern and it's generated an entry signal, where might we take profits? So as with support and resistance, investors can use price patterns to help identify a potential target area.

So let's start things off. As I mentioned, there are two primary categories of price patterns. We have continuation patterns, and then we have reversal patterns. Let's start with continuation patterns, which as a prerequisite, actually for each of these, a prerequisite is to identify the current trend of the stock. So that's why we spent some time in an earlier lesson talking about how a trader might identify a trend. I'm not going to spend much time on trend identification, but if you need to go back and revisit that, it's earlier in the webcast series. But these first four patterns that we're going to be discussing are continuation patterns. And I noted before I launched today's webcast that the first two patterns are continuation patterns.

And I noted before I launched today's webcast that this is just the Circulating Trends that we're going to be discussing. But I'm going to actually hear those two patterns. We've actually already given you a pretty good discussion earlier in the live streaming. Ben Watson just wrapped up a discussion. Barb Armstrong just wrapped up a discussion. These are possibly the most commonly appearing patterns on a chart. So I'm going to throw this question out. Bruce says, is this live? Time check. Yep. Bruce, does that help? You know, whether it's live or not? Yes, it's a live presentation. So I want to ask my live stream audience right now, if you want to do a live stream, I want you to do a live stream.

And if you want to do a live stream, where to tell me; for those that are familiar with price patterns, which price pattern is probably the one that shows up most commonly on charts? What's the one word answer I would give you? Now, there's not, I don't have data to confirm that this is the case, but it's definitely been my observation over decades of doing this. This is most likely the most common price pattern; and flags. Yep. So Ben Watson just wrapped up a discussion in a previous webcast on flags. Barb Armstrong dovetailed that right before. So let's talk about flags, if they're so common. So we're going to start off with this discussion of a bull flag. And it really is just, it's a pattern that prices make on a chart.

That's all we're talking about with each of these. But there are going to be five, five, five, five, five, five, five, five, five, five, five, five, five, five common elements for each of these patterns. First is always going to be, what is the trend? So a bull flag, as the name suggests, is generally used by traders who are looking to trade within bullish trends. And it is a continuation pattern of a bullish trend. So first and foremost, before we even start looking for bull flags, the trader might look to confirm that the stock is making higher highs and higher lows, or maybe it has a rising moving average, but the trend is bullish. The timeframe tends to be short-term for flags.

On a daily chart, a typical flag might last several days, I would say as a minimum, probably the smallest bull flag I can conceive of is probably three days. Just looking at daily candles, but days to weeks on average. The long end of a bull flag, yeah, they can run on for five, six, seven, eight, nine weeks conceptually, but most commonly probably going to, to start and end within a few days to a few weeks. Now the identification, otherwise known as the construction of the bull flag, starts with the identification of a strong initial move, known as a flagpole. So our example here in our graphic is this green area. So assume that we have a nice upward trend on a daily chart, and then all of a sudden, the stock explodes, and then we have a green line.

So that's the green line, and then the stock explodes higher, identified by this green line. So a flagpole, if you think about the flagpole that might be sticking off the front of your porch, it's generally pretty straight, right? Not terribly crooked, nobody wants a crooked flagpole. So it's usually an acceleration of upward trend with a few red candles here and there, but dominated by green candles, representing a disproportionately large move to the upside. Maybe the stock accomplishes, who knows, maybe even a year's worth of productivity in the next five, six, a short period of time. I'll talk, I'll illustrate that in just a moment. But that flagpole is what can initially get some traders excited. This stock is on the move, it's been going up, and now it's going up even faster.

Well, following the flagpole, we have this period that's called the flag. If you can envision the visuals here, you can see why this kind of looks like a flag, right? There's a flagpole, there's a flag, that's sort of the cloth portion of the flag, and then there's a side portion of the flag. The cloth portion is where we get a sideways, short-term, parallel, sometimes a little bit of a bearish downturn of support and resistance. So we have the explosive move up, there's our flagpole, and then the stock starts to flag downward. This period might just be profit-taking from traders who made so much money in a relatively short period of time during the formation of the flagpole. But that's the typical identification of a flag. That's a setup of a bullish possible entry.

So what is the entry? Well, an entry is when we break resistance. So here's our stock that's moved explosively higher. There's conceptually been some profit-taking carrying the stock down. Typically, it doesn't carry it down more than half the distance that it initially traveled up. And typically, it doesn't take more than half the distance that it initially traveled up. And typically, it doesn't take more than half the distance that it initially traveled up. And typically, it doesn't take more time to go down than it did to go up. Now, there can be exceptions to those general rules. But after this profit-taking period, when prices start to climb again, that's when traders might look to take entries on this bull flag scene.

And once we get that breakout, now a final element is to plan-well, if we're getting in now, when might we take profits? So that brings us to our potential target. So typically, and this is going to be typical of really all of our patterns that we talk about today, it's equal to the length or the length of the pole. Or another way I might say this is the height of the pattern. But a target is equal to the length of the pole. And then we add that to resistance. So for example, if we went up $10 on this flagpole, and then we pull back, and we're breaking out here, maybe the stock is set to make another $10 run.

But what we're hoping for here is just for the stock to do again what it's already done so recently. If it went up $10 recently on some excitement, maybe it can do that again. That's the basis for the flag trade. Grant says, how much retracement makes it not a bull flag? Oh, good question. Yeah. There's almost a bull flag just prior to this flag. What parameters make it not a flag? Yeah. And you're exactly right here, Grant. As a matter of fact, in an upward trend, very commonly, we see just a series of bull flags. So to address your question there, Grant, when there's a strong run up, but then a pullback for some traders, they might draw the line at about two-thirds.

If it goes, if a stock goes up $10, then it comes back down seven. The trader might be thinking, I don't know, is there any excitement left in this thing? Does that make sense? On the other hand, if a stock goes up $10, and it only pulls back three, well, maybe that's just a little bit of profit taking, and it's about ready to get rolling again. So let's go look at it in examples. That's okay to learn this stuff on paper, but let's go see a current example of behaviors like this on a stock chart. So here's BK. First thing that we look for is the trend. So where has this stock already been traveling? This has been a great trailing 12 months. This is a great trailing 12 months.

This is a great trailing 12 months for BK. And then you'll see within this nice upward trend, there's an acceleration of that trend. There's one here, there's one here, there's one here. Each one of these might be labeled flagpoles. So stock that's already experiencing apparently tilting toward bullishness in this tug of war between buyers and sellers. Now there's some additional excitement that's causing the stock to go up even faster. So, let's go look at BK. So, BK is a stock that's going to go up even faster. And that can attract the attention of would-be new traders, kind of like moths to a flame, potentially. Something exciting is happening here, probably getting a lot of headlines. But in each of these cases on BK, this stock ran up about 10%.

10% is about maybe what an average stock portfolio might expect in an average year's worth of performance. And here we're seeing that happen in about 10%. So, that's going to attract the attention of would-be new traders. And then in the second case, BK, this is a stock that's going to run up about two weeks. So you can see why some traders might say, 'Wow, I might want to get a piece of that if I can.' So the stock races up, and a trader who's excited by the excitement, but they're also cautious because they're looking maybe not to buy at the top of one of these peaks. Maybe they wait for the stock to pull back. So you can see how we call this possible flag.

And yeah, there's another one, maybe right here. That's where we get this downward-sloping sort of channel. This might just be some profit-taking. And the trader's looking for the profit-taking to end, for the buyers to come back in and start pushing the price higher. And at that point, maybe they're hoping the stock will repeat what it's done previously. Let me remove this drawing that I just threw on there. I want to do that a little bit more deliberately. But there's our flagpole. That's the identification of the flagpole. Well, how might we be able to get a piece of that? Well, we're going to have to look at the trend line. How might we plan to take profits, and how might we plan to take losses?

Let's assume that we got to push through this downward-sloping trend line right here, this downward-sloping resistance. That could generate our entry signal. Let's suppose that we got that entry signal, and the stock moved up to, who knows, about $77 right here. Well, what the trader might use is the length of the flagpole on that signal. Let's say we pop up here, breaking out at the $76 up to maybe $77 level. And we have a stock that previously traveled from $70 up to $70. I'm going to call that $78, about an $8 upswing. Well, if we can get another one on this breakout, at that breakout point, I'm going to say that's about $76.

The trader might say, well, if we go from $76 up another $8, that might provide a target of $84. So that might be where they plan to take profits. So that might be where they plan to take profits. So that might be where they plan to take profits. Well, are we guaranteed profits on this? Is the mere appearance of a bull flag a guarantee of performance? Nope. Sometimes these things falter, and the stock starts going down when we thought it was going up. So the trader, I'm going to zoom in on this a little bit more. Let's get all three of these most recent bull flag examples. For some, the trader might say, hey, if we start to get back into this flag, if we start to slip back down below that phi, it might be invalidating this signal.

I thought we were breaking out, but we're going to go higher. It's starting to go back lower. And they might make a plan, if we just get down below that to some extent, maybe it's time to pull the plug on that trade. So for example, on this breakout back here, they might have said, 'if we start to get back down into that flag to some extent, maybe down into this range, time to pull the plug.' In this case, it worked out; doesn't always work out. With the pattern trading, typically the trader, before they even initiate the transaction, they have a plan for taking profits and a plan for taking losses. George says, 'yeah, nothing is guaranteed.' Exactly right, George. So that's a bull flag. What do you think a bear flag looks like?

Guess what? It has all the same elements just heading the other direction. So with a bear flag, the trader might first of all, look to confirm a bearish trend, time frame, typically short-term days to weeks. The construction, a strong initial move known as a flagpole moving in the direction of the established trend. In this case, a strong move downward, followed by a sideways, short-term, parallel, or maybe a bullish retracement of support and resistance. In other words, if we're heading down, maybe for a little while we head back up. So, in this case, it could be profit taking on bearish trades, but also when a stock falls hard, like this one, here's our example of a flagpole. Some buyers might actually see that. Some bulls might see this as, boy, prices sure are a lot lower than they were recently.

And they might buy in for as maybe a value play. But conceptually, the idea here is, despite that, overall, the trend is still down. And after a little bit of value buying, maybe a little bit of bargain shopping, the price may just continue to fall. So if it does, maybe the trader plans for a bearish entry as we break down out of the flag pattern going downward. So what's the entry? A break of the support. The support in this case being this upward sloping red channel. If we break down out of that, there's our entry. And where might we plan to take profits if our bearish trade is ultimately profitable? Same deal. The target here might be a bearish trade. So if we break down out of that, there's our entry.

And where might we plan to take profits if our bearish trade is ultimately profitable? Same deal. The target here might be a bearish trade. So here's our flagpole length. We get a little bit of a bounce here. And then as we break down, we might take the length of that pole. Let's say it was $10 again. Subtract it from price right up here at the breakout point and project a downward bearish target. So, let's look at some examples of that on a chart. How about we go have a look at, let's say, BMY? This one, I was tempted to use this one for almost any trade. I don't know if it's going to be a... possibly, all kinds of examples for this discussion because, you know, like for this, a little bit of a spoiler, double top potentially here.

Was there, yeah, there's a triangle over here, possible double bottom or a rectangle down here, all kinds of things I could have illustrated. But let's just look at this period right here. Back in April, the stock hit a peak and pulled back. It hit a peak again, a little bit lower, and then started heading downward. So we started to establish lower highs, lower lows, downward trend, and then there was an acceleration of that trend right there. So how far did we go from about 52 bucks down to about 48? So about a $6 run down. That's more than 10% again in just a few days. This thing is falling hard. Now, can you envision, maybe there are some traders that came in and said, 'Oh, look at this, starting to climb again.' Could be some value there.

Maybe time for some bargain shopping, some buyers, push price up a little bit, and then the sellers come in. And in this case, they actually kicked it down severely. So for a bearish trader, they might look at this as a flag. And the example I can think of here, I don't know if you've ever seen auto racing where they swing, I don't watch auto racing, but I know that they can sometimes like swing the flag up and down. This is kind of swinging up an upside down flag. That's it. But for the entry, we look for a break of this support area. In this case, not only did we get a break, we got a gap downward. Where might the trader, if they're able to get in on a bearish trade, plan to take profits?

Well, they might take the length of the initial flagpole and duplicate it. And one thing that you can do on finger swim charts is when we've drawn a line, we can right-click on it and duplicate it. And then maybe tack that on to establish a target down here. And in this case, it looks like, yep, stock fell about that far, found some support, rallied up, and then started to sell again. Do you think someone might have looked at this and said, well, Cameron, isn't this, let me just clean this all off, clear the whole drawing set. Isn't this a flagpole itself, right there? Wasn't this a bear flag right here? And is it possible that the trader might have taken a trade right there and looked for a move to the downside again?

Yep, it's possible. In this case, we didn't quite get the severe downside that it did here. But yeah, that is typical bear flag trading. Now, with this sort of a trade, sometimes it just doesn't work out. So a trader might have seen this, oh, here's another bear flag. And this one didn't keep going down, it started going back up. So where might we plan to take losses if the pattern fails? Well, if the breakout was the reason to enter, if we reverse and start going back up into that breakout range, go back up into the flag itself, the trader might say, 'you know what, time to get back out.' I will say with both of these, with the bull flag and the bear flag, some may even wait for the flag to entirely reverse, going all the way back up and through this, the flag, the cloth portion of the flag before admitting they're wrong.

All right, let me make sure I'm not missing any charts. I don't think I am, but there's our bear flag example. So already two examples of price patterns. Let's go back and look at a third. Now, remember, we're sticking here with continuation patterns. So our third continuation pattern is something known as a triangle. And since the continuation pattern, we looked for a bullish, this is actually one of those that might be used bullishly or bearishly, but the trader first looks to confirm the trend either way. If it's bullish, then it's interpreted to be a bullish continuation pattern. If it's bearish, the same triangle may be interpreted to be a bearish continuation pattern. Wiley says, can we get PNF charts, meaning point and figure charts on thinkorswim? Nope. Those are not available on thinkorswim.

Timeframe for a typical triangle. These tend to be a little bit longer than a bull flag, probably about two to three times longer. They can be just a few weeks, but a timeframe can really be any timeframe; typically needs at least a month to form. A triangle consists of several moves in price, up, down, up, down. So it needs to have enough time to make those moves. The construction of this pattern is when we have a strong trend up or down, but then we hit a period of consolidation. That just means the stock is going sideways, but where the highs are coming lower, the lows are coming higher, converging support and resistance lines that are sort of dragging price out toward a point. So you can see that here.

In our illustration, we can see as the stock is coming down and going up and coming down and going up, the lows are going higher, the highs are coming lower. And I think it's tempting when we've been seeing a stock, in this case, you see this stock was moving up fairly sharply leading into the emergence of this pattern. When we start to see that sort of a behavior, it can be tempting to say, oh, it must be getting ready to reverse. Nope. Triangles are typically assumed to be continuation patterns. So if we see this sort of converging lower highs and higher lows in an upward trend, the assumption is we should be seeing a breakout in the direction of the previously established trend. So when do we enter?

Well, the trader might look for a break of resistance in the case of a bullish trend or break of support in the case of a bearish trend. So, break of support or resistance, depending on the trend, this just being a continuation pattern. And then how is the target established? Same way as a flag, same way, really as just about any price pattern. We look at the height of the pattern and attach that to the breakout point. So in this case, our height might be here and we attach that to this breakout point here to project the target to the upside. So let's go look at an example of triangles and I'm going to have a look at, what did I choose here, CDW? I thought I'd go for a bearish example here.

So here we have a stock that has been going going down, but then if you look at these highs and lows, highs are coming lower, so a downward resistance line. The lows though are going higher. And you can see how that's sort of converging out to a point, thereby giving it the title a triangle. What's really happening here is we have sort of an intensifying tug of war between buyers and sellers. In the early stages, it seems like the sellers had a solid upper hand, driving prices down significantly. Then the buyers came in, driving prices back up significantly. Sellers kicked back in and drive it lower, buyers higher, sellers lower, buyers higher, sellers lower. You can just imagine if there's a rope being tugged back and forth, initially big drag in one direction, big drag back in the other direction, but now it seems that we're reaching an excitement point.

Somebody's about to win this tug of war. And if we had a downward trend line leading into the pattern, the assumption is it's more likely that we get a break to the downside. The sellers are likely to win. And in this case, that's just what we saw. And so that breakout is the signal for entry. So that's when we enter. When do we take profits? Well, once again, the trader might look at the height of the pattern. Okay. Which right here, it's about this high. I'm going to right click on this and duplicate that drawing. And let's just drag that over. And if we position that at the breakout point, that may help the trader gauge where they might start looking to take profits if the stock continues in that new direction. And it looks like it's pretty close to being there already after just about a week.

Somebody just says, hi, Cam. Can we find out if a stock is in bankruptcy? That'll hit headlines, but also it can get delisted. So you might just see that stock disappear. I will say I've been around that sort of thing in the past. Always, we have to be cautious. I think it's been my experience that traders, when they suspect that a stock is going to go bankrupt, there can be some excitement. Ooh, maybe I'll buy some shares right before the bankruptcy. And then when they come out of bankruptcy, if they can emerge from bankruptcy, then the stock will go back up. It'll trade under different symbols, not the same shares. Those shares will be valueless. It's a sort of a side note, but thanks for asking the question.

But let's get to the flip side of the coin for this triangle pattern. Sometimes they don't work. Where might the trader admit that they're wrong and get back out? Well, as with the flag. When we're looking for that breakout, if the breakout reverses and we just go right back into the pattern, the trader might say, 'Oops, maybe I was premature.' Maybe this pattern isn't going to be one of those that works. And they might make a plan to just take their losses if we get back up into that pattern range. There we go. So we've learned several patterns. There's going to be a similar one here. Very similar in my eyes. The two of them are pretty similar. They have a similar pattern. And the difference not parallel to a triangle.

The difference is that the two of them don't overlap. It's just that instead of the support and resistance converging, they remain parallel to one another. But this is another continuation pattern known as a rectangle, alternately known as a channel. Before we even start looking for it, we first identify the trends, bullish or bearish. The the timeframe of a channel can last anywhere from you know, typically on a daily chart, it's going to take at least a few days to go up, a few days to go down, a few days go up, a few days go down, a couple of weeks to get a quote unquote legitimate channel going, but they can stretch on for any timeframe after that. But the identification of a channel or a rectangle is when we have a strong trend that consolidates with horizontal support and resistance lines.

So instead of them converging into a triangle, we have relatively similar highs and relatively similar lows. And you can see why that's kind of called a rectangle. If we were to draw a box around that, it's going to be a rectangular box. It's really what's happening here is maybe we have a strong trend. Let's say we have a bullish trend, stocks have been going up sharply, and then we just hit kind of a resting point, a balance point between buyers and sellers where the buyers are going to be going up sharply. And then we just hit kind of a resting point, the stock starts to go sideways. Well, yeah, actually the rectangle itself may be tradable inside of that, but a typical entry for a bullish rectangle is to get in on the breakout point again.

If we break through that resistance, the entry break of resistance with a bullish rectangle, a break of support with a bearish rectangle. In either case, they are continuation patterns. And then finally, the plan for taking profits if the profits manifest themselves ultimately. We just measure the height of the pattern, just like with flags, just like with triangles. We measure the height or the depth of the pattern and attach that to the breakout point, either add it in the case of a bullish breakout or subtract it in the case of a bearish breakout. So let's look at a bullish breakout. Let's go to our charts. And how about we look at a bullish breakout? A bullish breakout of a rectangle on RSG, or talk about a hypothetical.

We don't actually have a breakout on this one yet, but here we have a stock. Which direction was it heading before the emergence of this pattern? This was an uptrending stock. Then the stock starts to hit relatively similar lows, establishing a price floor, relatively similar highs, establishing a price ceiling. And for a bullish trader looking to trade this pattern, they might wait to break out of that price ceiling. That looks like it was around $208, just roughly speaking. So a breakout may signal the entry because that might mean that this relative period of balance between buyers and sellers is over, and the buyers are resuming control, and maybe the stock's ready to make another run. So if we get a breakout up here, in this case, $ 208, how might we establish a target?

And this is the answer to that question. If we get a breakout, Well, we just look at the depth of the pattern. This looks like it goes down to 198. So 198 lows up to about 208 highs, about a $10 range. If we got a breakout up here at 208, maybe the trader makes a plan to get out at 218. Well, what if the trade fails? Let's say the stock goes up here, it starts to break out and then it just collapses and goes right back down into that previous channel, back down into the rectangle. That might be where the trader says, oops, didn't get our legitimate breakout. It might be time to take our losses or our lumps. So a plan for the downside risk on this trade as well.

With all of these patterns, if we're using stop orders to manage that downside risk, we have to be aware that a stop order is not a guarantee that we're gonna get out at a specific price, but at least we have a plan for drawing a line in the sand. Let's see, trader says sometimes news are difficult. Yeah, sometimes it, yeah. Okay, so that's still on another topic. I'm not gonna revisit that, but good question. So each of these that we've discussed are what are known as continuation patterns. They're interpreted by a trader to be a pause point within an established trend and when we break out, of that pattern, that the previously established trend is likely to continue. But some patterns are seen to be signaling just the opposite.

Might be the end of a trend and the start of a new trend known as reversal patterns. So I wanted to go through two example reversal patterns today. There are lots of patterns that we're not discussing today. I can't cover them all. To do them any justice, we've got to limit things. But one potential reversal pattern is what we call a double top. So the trader might have looked to establish the trend. And in the case of a double top, we have a bullish trend that may be reversing to become bearish. So bearish upon exiting this pattern. A double top can appear in any time frame. Might be on a short-term chart. It might be on an intermediate-term chart. It might be on an intermediate-term chart.

It might be on an intermediate-term chart. It might be on a short-term chart, it might be on an intermediate-term chart, it might be on an intermediate-term chart, it might be on an intermediate-term chart, or it might be on a long-term chart. But the construction is fairly straightforward: A double top follows an upward trend, and at the peak of that upward trend, we see two relatively equal highs that form a resistance. So in our graphic here, we see an upward trending stock that ran up and hit a peak, pulled back down to a low. And as it attempted to rally, it got up to a similar peak and started to sell off again, thus giving it the next high. So we have a double top that follows an upward trend.

And at the peak of that upward trend, we see a formidably slight drop in price gonna pop up to over the layout. Pretty obvious. But that doesn't mean that the trend is over at that point. At that point what we know is that we have equal highs, but we still have, at least equal, possibly even higher lows. So a key point at this juncture is the trader looks at the lowest price between our two highs. So here are our two highs. We look at the lowest price between though two highs and if a subsequent price extends its end beyond that, that becomes the entry. That is our breakout support. At that moment, what do we have? Well, we have equal-ish highs, but lower lows. I think a case can be made for a downtrend at that moment.

So as of the emergence of that breakout point, how might the trader plan to take profits? Well, same thing that we've done with all of our other patterns. We look at the height or the depth of that pattern, measure that, and subtract that from the lows or the support to establish a potential time to take profits on a bearish trade here on our double top. So there are the elements of a double top. Let's go see them on a chart. So we had an example of a double top on NEE. So here's NextEra Energy. And you can see stock has been going higher, upward trend, just making higher highs and higher lows. And you can see we reached up to a peak right here, sold off to a low.

And as we attempted a rally, we just came right back up to the previous peak, very similar. It's not exactly the same, but similar. That could be identified by some as a potential emerging double top. The trend itself is starting to falter, coming into question. Now, it would be premature to say, well, the trend's over because we don't have lower highs and lower lows. But once we break below this, let me right click here. I'm just going to extend that to the right. As we break below that low, trader might say, geez, we went from equal highs. Now we have lower lows. Our trend appears to have reversed. And from here, if they're taking a bearish trade, where might they plan to exit with profits? They might look at the depth of this pattern.

Looks like we went from 86 down to about 80. So that's about a $6 range, top to bottom. If we're falling below 80, maybe the trader projects down to about 74. Let me draw that in here. Right there. That might be the plan for taking profits if the stock continues going downward. On the other hand, if it creeps back up into the sort of a channel at this point, if it gets back up above these lows, it's now moving in the wrong direction. And maybe the trader takes their lumps right there. So that is a double top. What do you suppose they might call a bullish reversal pattern that's similar? Yep, it's called a double bottom. Trend is bullish upon exiting this pattern. Bearish upon entering the pattern.

It can happen in any timeframe. The construction is it follows a downtrend, but where in this case we see relatively equal lows forming a support level. Two points separated by a valley in between them. So the trader might look at these two lows and if price can get back above that high, this is a good sign. And of course, this stuff is hoping that just two losses back up here is what he's after. So he's lucky at this point. So they're good yourself. Theuję going to down into& So let's write down those Sagittarius hedge the final lower quarter umbrella. And here at the top, the sorry, negative bottom empty dominating the last tendencies here and here's the Current linear volume change. Straight down below us.

here, price rallied up, hit a peak, sold off to quite a similar low, right around that $38 level. And so the trader might have a question mark. Ooh, this might be the start of a new bullish trend. In this case, though, really would not see a confirmation of this as a double bottom until, let's right-click on this, extend this to the right, if we can sneak back up above about $43. So yeah, this would have to travel some distance, about five bucks. If it's able to break above that high, where might the trader think it's headed next? Well, $5 range here to here. Let's duplicate that. It might look for taking profits. That's kind of interesting. Up near these previous highs here. So that's a double bottom.

We've determined how to recognize it, how to make a plan for targets. Where might we take losses if we're getting in on a breakout of this high? Well, if the price happens to, if it gets up here, breaks out through that high, but falls back down below that high, yeah, a trader might just get right back out again. So guys, with that, we've actually accomplished what I set out to do. Today, six price patterns, bullish and bearish examples. We looked at examples on our charts. So that concludes Lesson Seven, but we still have what could be the most important lesson coming up. We're going to be talking about putting together an investing plan, bringing everything together from these seven lessons into a structured set of rules that might govern one's plan for trading.

So don't miss that. But yeah, time for me to let you go. Thanks for giving me your time today. As you go, just remember, you have other resources available to you, including following us on X. You can find me on X right there, at CameronMayCS. This is the best place to connect with your favorite presenters in between the live streams. Doesn't cost anything to follow us. And as a matter of fact, I just dropped a heads up to my followers. Hey, we're going to be talking about price patterns in a few minutes, or in a few hours. Join me there. So yeah, follow us on X, but also make sure you're subscribed to our Trader Talks channel.

Thank you so much for joining us today. We'll see you next time. Bye-bye.

I'll see you next week for Lesson 8. I'll also look for you on X. I'll see you in other webcasts, but wherever I see you again. Until that moment arrives, I want to wish you the very best of luck. Happy trading. Bye-bye.