Beginner Chart Patterns: Head & Shoulders, Double Tops and More

3 Sep

Welcome to the world of chart patterns—the place where every price action tells a story. And if you read it right, you might just walk away with profits. In this Idea, we explore the immersive corner of technical analysis where chart patterns shape to potentially show you where the price is going. We’ll keep it tight and break down the most popular ones so you’d have more time to take your knowledge for a spin and look for some patterns (risk-free with a paper trading account?). Let’s roll.

Chart patterns are the market’s version of geometry paired with hieroglyphics. They might look like random squiggles at first, but once you learn to decode them, they might reveal where the market is headed next. Here are the mainstay chart patterns everyone should start with: Head and Shoulders, Double Tops, and a few other gems.

1. Head and Shoulders: The King of Reversals

First up is the Head and Shoulders pattern—an iconic, evergreen, ever-fashionable formation that traders dream about. Why? Because it’s a reliable reversal pattern that often signals the end of a trend and the beginning of a new one.

Here’s the breakdown: Imagine a market that’s been climbing higher. It forms a peak (a shoulder), pulls back, then rallies even higher to form a bigger peak (the head), only to drop again. Finally, it gives one last weak attempt to rise (the second shoulder), but it can’t reach the same height as the head. The neckline, a horizontal line connecting the two lows between the peaks, is your trigger. Once the price breaks below it, it’s time to consider shorting or bailing on your long position.

And yes, there’s an inverted version of this pattern too. It looks like a man doing a handstand and signals a trend reversal from bearish to bullish. That’s Head and Shoulders—flipping trends since forever.

2. Double Tops and Double Bottoms: The Market’s Déjà Vu

Next up, we have the Double Top and Double Bottom patterns—the market’s way of saying, “Been there, done that.” These patterns occur when the price tries and fails—twice—to break through a key level.

Double Top: Picture this: The price surges to a high, only to hit a ceiling and fall back. Then, like a stubborn child, it tries again but fails to break through. That’s your Double Top—two peaks, one resistance level, and a potential trend reversal in the making. When the price drops below the support formed by the dip between the two peaks, it’s a signal that the bulls are out of steam.

Double Bottom: Flip it over, and you’ve got a Double Bottom—a W-shaped pattern that forms after the price tests a support level twice. If it can’t break lower and starts to rally, it’s a sign that the bears are losing control. A breakout above the peak between the two lows confirms the pattern, signaling a potential bullish reversal.

3. Triangles: The Calm Before the Storm

Triangles are the market’s way of coiling up before making a big move. They come in three flavors—ascending, descending, and symmetrical.

Ascending Triangle: Here’s how it works: The price forms higher lows but keeps bumping into the same resistance level. This shows that buyers are getting stronger, but sellers aren’t ready to give up. Eventually, pressure builds and the price breaks out to the upside. But since it’s trading, you can expect the price to break to the downside, too.

Descending Triangle: The opposite of the ascending triangle, this pattern shows lower highs leaning against a flat support level. Sellers are gaining the upper hand and when the price breaks below the support, it’s usually game over for the bulls. But not always—sometimes, bulls would have it their way.

Symmetrical Triangle: This is the market’s version of a coin toss. The price is squeezing into a tighter range with lower highs and higher lows. It’s anyone’s guess which way it’ll break, but when it does, expect a big move in that direction.

4. Flags and Pennants: The Market’s Pit Stop

If triangles are the calm before the storm, then flags and pennants are the pit stops during a race. These patterns are continuation signals, meaning that the trend is likely to keep going after a brief pause.

Flags: Flags are rectangular-shaped patterns that slope against the prevailing trend. If the market’s in an uptrend, the flag will slope downwards, and vice versa. Once the price breaks out of the flag in the direction of the original trend, it’s usually off to the races again.

Pennants: Pennants look like tiny symmetrical triangles. After a strong move, the price consolidates in a small, converging range before breaking out and continuing the trend. They’re short-lived but pack a punch.

Final Thoughts

To many technical analysts, chart patterns are the best thing the market can do. The secret code, or however you may want to call them, they can give you insight into the dealmaking between buyers and sellers and hint at what might happen next.

Whether it’s a Head and Shoulders flashing a trend reversal, a Double Top marking a key resistance level, or a Triangle gearing up for a breakout, these patterns are essential tools in your trading garden.

So next time you stare at a chart, keep in mind that you’re not just looking at random lines. You’re reading the market’s mind from a technical standpoint. And if you know what to look for, you’re one step closer to cracking the code.