Chart patterns are recognisable shapes that form on price charts and have predictable outcomes. They are the result of collective human psychology playing out the same way repeatedly. Here are the patterns that actually work, how to spot them, and how to trade them.
Head and Shoulders
The most famous reversal pattern. Three peaks: the middle one (head) is the highest, the two on either side (shoulders) are roughly equal in height. The line connecting the two troughs between the peaks is the neckline.
When price breaks below the neckline, it is a bearish signal. The target is the distance from the head to the neckline, projected downward from the breakout point. The Inverse Head and Shoulders is the bullish version — same shape upside down, signalling a potential move higher.
Double Top / Double Bottom
Double Top (M shape): Price hits resistance twice at approximately the same level and fails to break through both times. Bearish reversal signal when the support between the two peaks breaks.
Double Bottom (W shape): Price hits support twice and bounces both times. Bullish reversal signal when the resistance between the two lows breaks.
Example
A stock hits £10.00 twice (double top), with a low of £8.50 between them. When £8.50 support breaks, the target is £8.50 - £1.50 (pattern height) = £7.00. This gives you a measured target to set your profit-taking level.
Triangles
Triangles form when price gets squeezed into a tighter and tighter range. Eventually, it breaks out.
- Ascending triangle: flat top (resistance), rising lows. Usually breaks upward. Bullish.
- Descending triangle: flat bottom (support), falling highs. Usually breaks downward. Bearish.
- Symmetrical triangle: both sides converge equally. Can break either way — wait for direction.
Flags and Pennants
After a strong, sharp move (the flagpole), price consolidates briefly in a small rectangle (flag) or triangle (pennant). These are continuation patterns — the price typically breaks out in the same direction as the initial move. The target is the length of the flagpole added to the breakout point.
Wedges
Rising wedge: both the highs and lows are rising, but the range is narrowing. Despite looking bullish, this is actually a bearish pattern — it usually breaks down.
Falling wedge: both highs and lows are falling with a narrowing range. Despite looking bearish, it is actually bullish — it usually breaks up.
Warning
False breakouts are common. Price breaks through a pattern boundary, you enter, and it immediately reverses. This is why you need confirmation: wait for a candle to close beyond the pattern level, check that volume is above average, and always use a stop loss. Patience saves money.
Key Concept
To measure pattern targets: measure the height of the pattern (from top to bottom) and project that distance from the breakout point. This gives you a reasonable price target. It is not exact — think of it as an area rather than a precise number.
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