Key takeaways
- Reversal patterns such as head and shoulders and double tops suggest a trend may be ending.
- Continuation patterns such as flags and triangles suggest a pause before the trend may resume.
- Measured-move targets project the height of a pattern from its breakout point, giving a rough guide rather than a forecast.
- Patterns are only confirmed by a breakout, and even confirmed patterns frequently fail.
Contents
Chart patterns are shapes that price traces over many candles as buyers and sellers battle. They are larger and slower to form than candlestick patterns, and they are built from the same ingredients covered earlier in this course: support, resistance and trendlines.
Patterns are usually grouped into two families: reversal patterns, which suggest a trend may be ending, and continuation patterns, which suggest a pause before the trend may resume.
Reversal patterns
Head and shoulders
A head and shoulders top forms after an uptrend. It has three peaks: a left shoulder, a higher head and a right shoulder of roughly similar height to the left. A neckline connects the lows between the peaks. The pattern is confirmed when price closes below the neckline.
The inverse head and shoulders is the mirror image after a downtrend, confirmed by a close above the neckline.
Double top and double bottom
A double top shows two peaks at roughly the same level with a trough between them. It suggests buyers failed twice to push higher. Confirmation comes when price closes below the trough.
A double bottom is the reverse: two lows at a similar level, confirmed by a close above the peak between them. Triple tops and bottoms follow the same logic with three tests.
Continuation patterns
Flags and pennants
After a sharp move (the "flagpole"), price consolidates briefly. A flag is a small channel sloping against the trend; a pennant is a small symmetrical triangle. Traders watch for a breakout in the direction of the original move.
Triangles
- Ascending triangle: flat resistance with rising lows. Often viewed as bullish.
- Descending triangle: flat support with falling highs. Often viewed as bearish.
- Symmetrical triangle: falling highs and rising lows converging. Direction is neutral until a breakout occurs.
Rectangles
Price bounces between horizontal support and resistance. A rectangle in a trend may be a pause; a breakout shows which side won.
Measured-move targets
A common way to estimate a target is to measure the height of the pattern and project it from the breakout point.
| Pattern | Height measured from | Projected from |
|---|---|---|
| Head and shoulders | Head to neckline | Neckline break |
| Double top or bottom | Peak (or trough) to confirmation line | Confirmation line break |
| Triangle | Widest part of the triangle | Breakout point |
| Flag | Length of the flagpole | Breakout from the flag |
These targets are rough guides. Price often stops short, overshoots or never reaches them.
Worked example: head and shoulders
Assume, for illustration, that GBP/USD forms a head and shoulders top:
- Left shoulder: 1.2900
- Head: 1.3000
- Right shoulder: 1.2900
- Neckline: 1.2800
Target: pattern height = 1.3000 − 1.2800 = 0.0200 = 200 pips. Projected from the neckline: 1.2800 − 0.0200 = 1.2600.
Trade plan (short):
- Entry: 1.2790, after a daily close below the neckline
- Stop-loss: 1.2910, just above the right shoulder
- Risk: 1.2910 − 1.2790 = 0.0120 = 120 pips
- Take-profit: 1.2600
- Reward: 1.2790 − 1.2600 = 0.0190 = 190 pips
- Risk-reward: 120 : 190, about 1:1.6
Some traders instead wait for price to retest the broken neckline from below, which can allow a tighter stop but risks missing the move if no retest happens. The Risk-Reward Calculator and Position Size Calculator help you compare these plans.
Worked example: double bottom
Assume EUR/USD forms two lows near 1.1000 with a peak of 1.1150 between them.
- Height: 1.1150 − 1.1000 = 150 pips
- Confirmation: a close above 1.1150
- Measured-move target: 1.1150 + 0.0150 = 1.1300
Until price closes above 1.1150, there is no confirmed double bottom, only two lows.
Why patterns fail
- False breakouts: price breaks the neckline or boundary, then quickly returns.
- News shocks: a surprise data release can overwhelm any chart structure.
- Subjectivity: two traders can look at the same chart and see different patterns.
- Hindsight bias: textbook examples are chosen after the fact; live patterns look messier.
Because of this, define in advance where the pattern would be invalidated and size the position so that a failure is an affordable loss.
Common mistakes
- Trading before confirmation. Anticipating a breakout can work, but it carries more risk of being wrong.
- Seeing patterns everywhere. If you have to squint, the pattern is probably not there.
- Treating targets as certainties. Consider taking partial profits or using a trailing stop rather than holding for one exact price.
- Ignoring the bigger trend. A small bearish pattern inside a strong weekly uptrend has a lot to overcome.
Summary
Chart patterns describe the ongoing contest between buyers and sellers. Reversal patterns, such as head and shoulders and double tops or bottoms, suggest a trend may be ending. Continuation patterns, such as flags and triangles, suggest a pause. Measured-move targets offer a rough guide by projecting the pattern's height. No pattern is reliable on its own, so wait for confirmation, define your stop and keep risk small. The next lesson, Risk-Reward Ratio, shows how to judge whether a setup is worth taking.
Glossary terms in this lesson
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Practice worksheet
Practice worksheet
4 exercises to try on paper. Print it, save it as a PDF from the print dialog, or download a plain-text copy.
- A double top forms with peaks at 1.1250 and a trough at 1.1100. Calculate the measured-move target after a break of 1.1100.
- An ascending triangle has a flat top at 1.2700 and its widest point starts at a low of 1.2550. Calculate the measured-move target after an upside breakout.
- For the head and shoulders example in this lesson, recalculate the risk-reward ratio if the stop were placed at 1.2860 instead of 1.2910.
- Find one chart pattern on a daily chart from the past year. Record whether it reached its measured-move target, stopped short or failed.
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