Beyond single candlestick patterns and simple support/resistance, price often forms larger, recognizable shapes over many candles. These chart patterns are a bridge between basic price reading and indicator-based analysis — many traders watch for them before checking what an indicator says.
Reversal vs Continuation Patterns
- Reversal patterns suggest the current trend is ending and price is about to turn the other way.
- Continuation patterns suggest a pause before the existing trend resumes in the same direction.
This lesson covers two of the most recognized reversal patterns. What makes a reversal pattern credible is that it visibly records the trend failing: an uptrend is defined by higher highs (see Trend vs Range), so a pattern where price tries and fails to make a new high is the trend's own definition breaking down in real time.
Head and Shoulders
A Head and Shoulders pattern forms after an uptrend and signals a potential reversal down. It has three peaks:
- Left shoulder — a peak followed by a pullback.
- Head — a higher peak than the left shoulder, followed by another pullback to roughly the same level as before.
- Right shoulder — a peak similar in height to the left shoulder, followed by a decline.
The neckline connects the two pullback points between the peaks. The pattern is considered confirmed when price closes below the neckline, which is typically treated as the entry signal.
Read as a story rather than a shape: the head is the uptrend's last successful new high. The right shoulder is the market trying to make another one and failing at a lower point — buyers are visibly weakening. The neckline break is the moment sellers take over the level that supported both pullbacks. The same pattern flipped upside down after a downtrend — an Inverse Head and Shoulders — signals a potential reversal up, with the neckline above and a break upward as confirmation.
Double Top
A Double Top also forms after an uptrend and signals a potential reversal down. It's simpler than Head and Shoulders: price makes a peak, pulls back to a support level, rallies to a second peak at roughly the same height, then fails again. A break below that support level confirms the pattern.
The mirror version — a Double Bottom — forms after a downtrend and signals a potential reversal up, with two troughs at roughly the same level instead of two peaks.
"Roughly the same height" is deliberate — the second peak rarely matches the first to the pip, and often falls slightly short of it (an early hint of weakness) or slightly overshoots it before collapsing back (trapping breakout buyers, which can make the reversal even sharper).
Entries, Stops, and Measured Targets
These patterns come with a traditional trade structure built in:
- Entry — either on the candle that closes beyond the neckline/support, or more conservatively on the retest: price frequently returns to the broken level and rejects it (the role-reversal effect from Support and Resistance) before the real move — a second, often cleaner entry with a tighter stop.
- Stop Loss — beyond the right shoulder (Head and Shoulders) or beyond the second peak/trough (Double Top/Bottom). If price gets back there, the reversal idea is simply wrong.
- Target — the classic measured move: take the height of the pattern (head to neckline, or peak to support) and project that same distance beyond the breakout point. A Double Top with 60 pips between peak and support projects a target roughly 60 pips below the break. It's an estimate, not a law — but it gives the trade a defined Risk:Reward before entry, which is exactly what Risk Management Basics asks for.
Why the Neckline/Support Break Matters
Both patterns are considered unconfirmed (and unreliable to trade) until price actually closes beyond the neckline or support level. Many traders who jump in before that break get caught when price simply continues ranging instead of reversing — the shape looking "almost right" isn't the same as the pattern completing. Roughly speaking, every Double Top that never breaks its support was actually just a range, and shorting inside a range near its floor is a poor trade even when the shape looked convincing.
Other Patterns Worth Knowing About
Once these two are comfortable, the same logic extends to the rest of the classical catalog: triple tops/bottoms (one more failed attempt at the same level), triangles and flags (continuation patterns — the pause-and-resume structures), and wedges. All of them reduce to the same two questions: what does this shape say about who's winning, and what level confirms it?
A Word of Caution
Chart patterns are subjective — what looks like a clean Head and Shoulders to one trader may look messy or invalid to another, especially on lower timeframes with more noise. Beware of pattern-hunting: stare at any chart long enough and you'll "find" one, so it's healthier to let obvious patterns come to you than to squint until one appears. They work best on higher timeframes, combined with support and resistance and a look at overall trend vs range conditions, rather than traded in isolation.