Chart patterns are recognizable shapes that price traces on a chart as buyers and sellers change their minds. A trend rarely turns on a single bar: it slows, pauses and then either resumes or reverses, and those phases tend to leave the same few shapes behind on stocks, indices, currencies and crypto alike. Richard Schabacker catalogued many of them in the 1930s, and Robert Edwards and John Magee made them standard reading in Technical Analysis of Stock Trends (1948).
Patterns fall into two families. Reversal patterns mark the end of a trend; continuation patterns are pauses after which the trend usually carries on. In both, the signal is the breakout, not the shape itself.
The main patterns
- Head and shoulders. Three peaks, the middle one highest, with a “neckline” drawn under the two troughs between them. The uptrend has failed to make a new high on the right shoulder, and a close below the neckline confirms the top. The inverse version, upside down, forms at bottoms.
- Double and triple tops and bottoms. Price meets the same resistance (or support) two or three times and fails to break it. A double top is confirmed when price falls below the low between the two peaks; a double bottom when it rises above the high between the two troughs.
- Rounding tops and bottoms. A slow, bowl-shaped turn as expectations shift gradually. Volume often traces the same bowl: heavy in the old trend, light at the turn, heavy again as the new trend starts. The cup and handle is a rounding bottom followed by a short, shallow pullback.
- Triangles. The range narrows between converging lines. An ascending triangle has a flat top and rising lows and more often breaks up; a descending triangle has a flat bottom and falling highs and more often breaks down; a symmetrical triangle gives little hint of direction.
- Flags and pennants. Short continuation patterns after a sharp move: a small channel sloping against the trend (flag) or a small triangle (pennant). The steep move before them is part of the pattern.
- Channels. Price swinging between two parallel lines, rising, falling or flat. Traders use the lines as support and resistance until one breaks.
How to read a pattern
- Wait for the breakout. A pattern is only a candidate until price closes beyond its boundary: the neckline, the flat side of a triangle, the line of a flag. Many shapes that look like tops never break down.
- Check the volume. A breakout on clearly higher volume is more convincing than one on average volume. In a classic head and shoulders, volume fades on the head and the right shoulder and expands on the break.
- Expect a retest. After a break it is common for price to come back to the broken line before moving on. If it cannot get back through, the breakout is holding; if it can, the pattern has failed.
- Measured targets. A common rule of thumb projects the height of the pattern from the breakout point, for example the distance from the head to the neckline. Treat it as a rough guide, not a forecast.
- Size and time. Patterns that take longer to form and span a wider range usually lead to bigger moves than small ones that form in a few days.
Settings and common mistakes
- Seeing patterns everywhere. Almost any chart contains something that looks like a triangle. Stick to clear shapes on the timeframe you trade, preceded by a real trend for reversal patterns.
- Acting before confirmation. Selling a stock because a right shoulder might be forming is a guess. The neckline break is the signal.
- Ignoring failed patterns. A breakout that quickly reverses back inside the pattern is a signal too, often a strong one in the opposite direction.
- Forgetting the trend. A bullish continuation pattern in a long-term downtrend is a weaker setup than the same pattern above a rising 200-day average.
Live chart: SPY (S&P 500 ETF), daily, with the ZigZag(7) indicator, which connects swings of 7% or more and shows the peaks and troughs patterns are built from. The chart updates every trading day.
Screen for it on MarketInOut
Our formula language recognizes the traditional patterns automatically, as events such as double_bottom, inv_head_shoulders, asc_triangle, flag, pennant and cup_handle. Bullish reversal patterns in stocks that are above their 200-day average:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and (double_bottom or inv_head_shoulders)
Bullish continuation patterns (ascending triangles, flags and pennants) in the same uptrending stocks:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and (asc_triangle or flag or pennant)
Related: Candlestick patterns, Fibonacci retracements, On Balance Volume (OBV).
