Chart patterns are recognisable shapes in price that suggest the likely next move. Continuation patterns, such as triangles and flags, usually resolve in the trend's direction. Reversal patterns, such as head and shoulders and double tops, warn that a trend may be ending. You trade the breakout with a stop beyond the pattern. Without context, a pattern is a shape, not a signal.
What are chart patterns?
A chart pattern is a shape that price traces out repeatedly, because it reflects a recurring tug-of-war between buyers and sellers. A triangle is price coiling as a range tightens. A double top is buyers failing twice at the same level. The shape is a picture of structure forming.
Patterns matter because enough traders watch them that their breakouts attract real orders. But they are probabilities, not prophecies. Many fail, which is why every pattern trade needs a defined stop.
Continuation patterns
Continuation patterns are pauses within a trend that usually resolve in the same direction. The common ones are:
- Triangles. Symmetrical, ascending and descending.
- Flags and pennants. Brief consolidations after a strong move, like a breather before the trend resumes.
You trade them on a break in the trend's direction. A flag in an uptrend that breaks upward is a classic continuation entry, with a stop below the flag.
Reversal patterns
Reversal patterns warn that a trend may be ending. The best known are the head and shoulders and the double top or double bottom.
- Head and shoulders. Three peaks, the middle one highest, breaking a neckline.
- Double top or bottom. Two failed attempts at a level.
They mark a shift from one side's control to the other's. Reversals are higher-stakes. They fail more often than they succeed if traded early, so take them on confirmation, a decisive break of the pattern's key level, rather than in anticipation.
Trading the breakout
Most patterns are traded the same way. Wait for price to break the pattern's boundary, ideally on a retest for confirmation. The stop goes just beyond the pattern. The target is often a measured move, which is the pattern's own height projected from the breakout.
Beware the false breakout, where price pokes through and snaps back. Waiting for a close beyond the level, or a successful retest, filters many of these out. The cost is a slightly later entry.
Context and risk
A pattern is worth more when it aligns with the bigger picture. That means a continuation pattern in the direction of the higher-timeframe trend, or a reversal at a major level. On its own, a shape in the middle of nowhere is low-odds. Combine pattern, trend and level, exactly as with candlesticks.
As always, the pattern defines the stop, and the stop sizes the trade. Patterns give you a structure for entries and risk, not a guarantee of outcome.
Questions
How do you trade a chart pattern?
Wait for price to break the pattern's boundary, ideally confirming on a retest. Place a stop just beyond the pattern, and often target a measured move equal to its height.
What is a head and shoulders pattern?
A reversal pattern of three peaks, the middle one highest. It signals a possible top when price breaks below the neckline connecting the lows. An inverse version signals a possible bottom.
Do chart patterns actually work?
They have an edge only with context. A pattern in isolation is a low-probability shape, so every pattern trade still needs a defined stop.
70–80% of retail investor accounts lose money trading CFDs. This page is education, not advice. All trade examples are constructed composites.
