The short answer
Chart patterns are recognisable shapes in price that suggest the likely next move. They split into continuation patterns — triangles, flags and pennants, which usually resolve in the trend's direction — and reversal patterns — head and shoulders, double tops and bottoms, which warn a trend may be ending. They are traded on the breakout of the pattern, with a stop beyond it. Like candlesticks, they only carry an edge with context; a pattern in isolation 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, descending), and flags and pennants — brief consolidations after a strong move, like a breather before the trend resumes.
They are traded 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 (three peaks, the middle highest, breaking a neckline) and the double top / double bottom (two failed attempts at a level). They mark a shift from one side's control to the other's.
Reversals are higher-stakes and fail more often than they succeed if traded early, so they are best taken 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 (role reversal again). The stop goes just beyond the pattern; the target is often a measured move — the pattern's own height projected from the breakout.
Beware the false breakout: price pokes through and snaps back. Waiting for a close beyond the level, or a successful retest, filters many of these out at the cost of a slightly later entry.
Context and risk
A pattern is worth more when it aligns with the bigger picture: 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.
And 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.
Frequently Asked Questions
What is the difference between continuation and reversal patterns?
Continuation patterns (triangles, flags, pennants) are pauses that usually resolve in the direction of the existing trend. Reversal patterns (head and shoulders, double tops and bottoms) warn that a trend may be ending.
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 the pattern's height projected from the breakout.
What is a head and shoulders pattern?
A reversal pattern of three peaks, the middle one highest, that signals a possible top when price breaks below the neckline connecting the lows. An inverse version signals a possible bottom.
What is a false breakout?
When price breaks a pattern's boundary and then quickly snaps back inside, trapping breakout traders. Waiting for a close beyond the level or a successful retest filters out many false breakouts.
Do chart patterns actually work?
They have an edge only with context — aligned with the higher-timeframe trend or forming at a major level. A pattern in isolation is a low-probability shape, so every pattern trade still needs a defined stop.