2.6 Chart Patterns

Learn the patterns worth knowing, the ones that are mostly folklore, and how to trade the real ones with proper risk control.

Layer 2: Chart Literacy — Chapter 6 Goal: Learn the patterns worth knowing, the ones that are mostly folklore, and how to trade the real ones with proper risk control.

The Core Idea

Chart patterns are recurring formations in price action that historically resolve in predictable directions. They work for a mix of reasons: real underlying order flow, technical-trader self-fulfillment, and survivorship bias in pattern literature.

Some patterns have decades of statistical backing. Others are pure pattern-matching nonsense. This chapter separates them.

Two Categories

Continuation Patterns

The trend pauses to consolidate, then resumes in the same direction.

Examples: flags, pennants, rectangles, ascending triangles (in uptrends).

Mental model: "Catching your breath" before continuing.

Reversal Patterns

The trend exhausts and changes direction.

Examples: head and shoulders, double tops/bottoms, triple tops/bottoms.

Mental model: "End of the road" — direction flips.

Patterns Worth Mastering

These have the strongest evidence and clearest mechanics.

1. Bull Flag (Continuation)

Looks like:

Strong upward move ("flagpole")
Tight, downward-sloping consolidation ("flag")
Break of the flag's upper boundary → resumption of the uptrend

Why it works:

After a sharp rally, traders take profits → mild pullback
Pullback is shallow because the trend is strong
Volume dries up during the flag (no new selling pressure)
Break = institutional buyers re-enter

Entry: Break of the upper flag trendline (with volume). Stop: Below the lowest point of the flag. Target: Same height as the flagpole, projected from the breakout.

Verdict: Real, statistically validated, one of the highest-edge patterns in technical analysis.

2. Bear Flag (Continuation)

Mirror of bull flag. Strong drop, mild upward consolidation, breakdown continues the move.

3. Pennant (Continuation)

Looks like:

Strong move
Symmetrical triangle consolidation (converging trendlines)
Break → continuation

Differences from flag:

Triangular (not parallel)
Tighter and faster
Usually resolves within 1-3 weeks

Verdict: Real and tradeable. Similar mechanics to flags.

4. Rectangle / Range (Continuation OR Reversal)

Looks like:

Horizontal channel
Multiple touches of support and resistance
Eventually breaks one direction

Mechanics:

Equilibrium between buyers and sellers
Resolution direction is whoever wins (volume on break tells you)

Entry: Break of either boundary with volume. Stop: Inside the rectangle (on the opposite side of the break). Target: Height of the rectangle projected from the break.

Verdict: Very real. Range trading until break, then breakout trading.

5. Cup and Handle (Continuation)

Looks like:

Rounded bottom forming a "U" shape (the cup) — usually 6+ weeks
Followed by a small downward pullback near the cup's right rim (the handle)
Break above the cup's rim → uptrend continuation

Why it works:

The U shape represents accumulation after a downtrend
The handle is a final shakeout
Break = institutional confirmation of the new trend

Notable: Popularized by William O'Neil; foundation of the CAN SLIM methodology.

Verdict: Real and famous. Works well in growth stocks and uptrending markets.

6. Head and Shoulders (Reversal — Bearish)

Looks like:

Three peaks: left shoulder, head (highest), right shoulder
"Neckline" connecting the two troughs between peaks
Break below the neckline → trend reversal

Why it works:

Initial peak = enthusiasm
Head = climax of buying
Right shoulder = failed retest (buyers exhausted)
Neckline break = sellers take control

Entry: Break below the neckline (with volume). Stop: Above the right shoulder. Target: Distance from head to neckline, projected down from the break.

Verdict: Real and reliable on higher timeframes (daily, weekly). Often forms over weeks/months.

7. Inverse Head and Shoulders (Reversal — Bullish)

Mirror of H&S. Three troughs (the head being lowest), break above the neckline → uptrend.

8. Double Top (Reversal — Bearish)

Looks like:

Price hits a high
Pulls back
Tries again, fails at the same level
Breaks below the pullback low → reversal

Why it works:

First high attracted sellers
Second attempt confirms supply at that level
Break of the intermediate low = bearish confirmation

Entry: Break of the intermediate low (the "neckline"). Stop: Above the double top. Target: Distance from top to neckline, projected down.

Verdict: Reliable, especially on higher timeframes.

9. Double Bottom (Reversal — Bullish)

Mirror. Two troughs at the same level, break above the intermediate high.

10. Triple Top / Triple Bottom

Like double but with three touches. Even stronger signal, but less common.

Triangle Patterns (Continuation or Reversal)

Triangles are versatile. The slope of the trendlines tells the bias.

Ascending Triangle

Flat resistance at the top
Rising support at the bottom
Bias: bullish (buyers consistently step in higher, hitting the same ceiling)
Resolves: usually breakout up

Descending Triangle

Flat support at the bottom
Falling resistance at the top
Bias: bearish (sellers consistently step in lower)
Resolves: usually breakdown down

Symmetrical Triangle

Both trendlines converge toward a point
No bias — equal pressure from both sides
Resolves: usually in the direction of the prior trend (continuation)

Trading Triangles

Wait for breakout/breakdown
Confirm with volume
Target = height of the triangle projected from the break

Wedge Patterns

Two trendlines converging in the same direction.

Rising Wedge (Bearish)

Both lines slope up, but the lower line steeper
Price is making higher highs and higher lows, but the move is decelerating
Resolves: usually breakdown down (counter-intuitive!)

Falling Wedge (Bullish)

Both lines slope down, but the upper line steeper
Move is decelerating
Resolves: usually breakout up (counter-intuitive!)

Why they break against their slope:

Wedges represent exhaustion of the prevailing move
Tighter price action = less conviction
Resolution comes from the exhausted side losing control

Patterns That Are Mostly Folklore

These appear in textbooks but have weak statistical evidence. Be skeptical.

"Diamond" Pattern

A rare formation with a broadening top and narrowing bottom. Theoretically a reversal pattern. In practice: hard to identify, low predictive value.

"Three Drives" Pattern

Three sequential pushes higher (or lower) with proportional pullbacks. Theoretically signals exhaustion. In practice: too subjective, retroactively cherry-picked.

"Cup and Saucer"

Like cup and handle, but flatter. Marginal value over a regular cup pattern.

"Bump and Run"

A blow-off top followed by a controlled decline. More descriptive than predictive.

"Adam and Eve" Tops/Bottoms

Classification of double tops based on shape ("spike" vs. "rounded"). Adds complexity without much edge.

Pattern Failure: How to Handle It

Patterns fail roughly 30-40% of the time, even good ones. When they fail:

Signs of Imminent Failure

Volume isn't confirming on the breakout
Price closes back inside the pattern after breaking
Wider market is moving against the expected direction

What to Do

Honor your stop. No exceptions.
A failed pattern can lead to a strong move in the opposite direction
Don't average down or hope

The Inverse Trade

Sometimes a failed pattern becomes a tradeable opposite signal. Example: failed bull flag often becomes a strong short setup.

Confluence — Stacking Patterns with Other Signals

The best setups have multiple confirmations:

Bull flag + 50-day MA support + horizontal S/R = very strong long
Head and shoulders + breakdown below 200-day MA + bearish divergence = strong short
Cup and handle + rising sector trend + earnings beat = high-conviction long

One signal alone is weak. Confluence is your edge.

Pattern Statistics: The Honest Picture

From Bulkowski's research (one of the few empirical sources):

Pattern	Success Rate	Notes
Head and Shoulders	~65%	Higher in bear markets
Double Top	~65%	Reliable on higher TFs
Bull Flag	~70%	One of the best continuation patterns
Bear Flag	~65%
Ascending Triangle	~65%	Trend continuation
Cup and Handle	~60%	William O'Neil's favorite
Rising Wedge	~55%	Less reliable
Symmetrical Triangle	~55%	Slight bias toward prior trend

Reality check: Even the best patterns are 60-70% — they fail 30-40% of the time. Your edge comes from good risk/reward, not high win rates.

How to Use Patterns Practically

Workflow

Identify the trend (Chapter 2.3)
Look for patterns aligned with the trend (continuation patterns)
For potential reversal patterns, confirm with multiple signals (volume, higher TF, MA breaks)
Wait for the pattern to complete — don't anticipate
Enter on confirmation (close beyond the pattern boundary, often with volume)
Set stop below/above the pattern
Target based on pattern height projection

Don't

Force patterns where they don't exist
Trade pattern breakouts without volume confirmation
Hold through a failed pattern hoping it recovers
Trade every pattern — be selective

Pattern Recognition Practice

To get good at this:

Study historical charts with marked-up patterns
Look at 100+ examples of each pattern (TradingView's drawing tools + zooming through history)
Mark patterns in real time before they complete, see if you were right
Journal patterns you take, win or lose, to track your hit rate
Don't trade patterns until you can spot them consistently

This takes weeks-months. Worth it.

A Mental Model

Patterns are like footprints in the snow:

They tell you what happened (price went up, paused, then went up more)
They suggest what might happen next (similar paths often resolve similarly)
They're guides, not guarantees (someone could go a different direction)
They're easier to spot in hindsight than in real time
Most importantly: the presence of a pattern doesn't make a trade work; the underlying order flow does.

Practical Takeaways

Master a few patterns deeply rather than knowing many superficially.
For continuation: bull/bear flags, pennants, rectangles, cup and handle.
For reversal: head and shoulders, double tops/bottoms.
For ambiguity: triangles (slope tells the bias).
Volume confirmation is critical for pattern breakouts.
Stops go beyond the pattern boundary, not within.
Targets are measured from the pattern's dimensions (height projected from breakout).
Patterns fail 30-40% of the time. Plan for that.

Quick Self-Check

Before moving to 2.7, you should be able to answer:

What's the difference between a continuation and a reversal pattern?
How do you measure the target on a bull flag?
What's the structure of a head and shoulders pattern?
What's the difference between an ascending triangle and a symmetrical triangle?
Why do wedges often break opposite to their slope?
What are the patterns NOT worth memorizing?
What role does volume play in confirming pattern breakouts?

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