Reversal Patterns
Head and Shoulders — three peaks, with the middle one (head) higher than the two sides (shoulders). When the neckline breaks, it signals a trend reversal from bullish to bearish. The inverse head and shoulders signals a reversal from bearish to bullish.
Double Top — price reaches the same resistance level twice and fails both times. Signals a bearish reversal. Double Bottom is the opposite — price tests the same support twice and holds, signalling a bullish reversal.
Continuation Patterns
Flags and Pennants — brief consolidation periods within a strong trend. A bull flag is a slight pullback during an uptrend, forming a rectangular or pennant shape before the trend resumes. They suggest the current trend is pausing, not reversing.
Triangles — ascending (bullish bias), descending (bearish bias), and symmetrical (could break either way). Price compresses into a narrowing range before eventually breaking out in one direction.
Measuring Pattern Targets
Most chart patterns have a measurable target. For a head and shoulders, the expected move after the neckline break equals the distance from the head to the neckline. For a triangle, the expected breakout move equals the height of the triangle at its widest point.
These targets aren't guaranteed, but they give you a rational basis for setting take-profit levels.
Reliability and Confirmation
Chart patterns are probabilistic, not deterministic. A textbook head and shoulders formation might fail 30-40% of the time. This is why confirmation matters — wait for the neckline or trendline to actually break before entering, rather than anticipating the break.
Volume can also confirm patterns. A breakout on high volume is more likely to follow through than one on low volume.
Key Takeaways
- Head and shoulders is the classic reversal pattern — watch the neckline break
- Double tops and bottoms signal failed attempts to break key levels
- Flags and triangles are continuation patterns within existing trends
- Every pattern has a measurable price target based on its geometry
- Wait for confirmation and check volume before acting on any pattern
