Every chart pattern comes with a line. A double top is two highs at about the same price, with its line at the low between them. A head and shoulders is three highs with the middle one highest. Its line is the neckline under them.
Until a candle closes beyond its line, a pattern is only a potential one. The close turns the shape into the pattern.
This page covers the eight patterns beginners meet first: what each one looks like, the line it waits on and the close that confirms it. The first lesson, double top and double bottom, has you draw a double top's line and wait for a close below it.
What are the most common chart patterns?
The line in the third column is the one traders watch. A wick through it does not count, only a close.
| Pattern | What it looks like | The line traders watch | Confirmed by |
|---|---|---|---|
| Double top | Two highs at about the same price, a dip between them | The lowest point of the dip | A close below the line |
| Double bottom | Two lows at about the same price, a bounce between them | The highest point of the bounce | A close above the line |
| Head and shoulders | Three highs, the middle one highest | The neckline, through the lows between them | A close below the neckline |
| Inverse head and shoulders | Three lows, the middle one lowest | The neckline, through the highs between them | A close above the neckline |
| Bull flag | A fast rise (the pole), then a short drift down that gives back less than half of it | The flag's upper edge | A close above that edge |
| Bear flag | A fast fall, then a short drift up that takes back less than half of it | The flag's lower edge | A close below that edge |
| Cup and handle | A rounded dip back up to the old high, then a small dip in the cup's upper half | The rim, the cup's old high | A close above the rim |
| Triangle | Highs and lows squeezing together between two lines | Both lines | A close outside either one |
What are reversal and continuation patterns?
A reversal pattern forms at the end of a move and marks where it may turn. The double top and the head and shoulders form after a rise. Their mirrors form after a fall.
A continuation pattern is a pause inside a move. A bull flag and the cup and handle form partway up a rise, a bear flag partway down a fall.
Traders read a continuation pattern as the move resting before it goes on.
Triangles fit neither group. The price can leave them on either side.
Why do traders wait for the close?
Two highs at about the same price are the start of a double top, not the pattern. The price can turn back up before any candle closes below the dip between them.
A double top is only a potential one while every close stays above its line. A day that dips below the line and closes back above it has not confirmed anything.
The first lesson ends on a chart where two tops form in one zone.
The price comes back down to the line and holds. Then the price climbs past both tops.
Do chart patterns always work?
No. Any pattern can fail, even after the close that confirms it.
A close below a double top's line followed by a close back above it is a false break.
In the Journal of Finance in 2000, Andrew Lo, Harry Mamaysky and Jiang Wang wrote ten patterns as rules a computer could find, the double top and head and shoulders among them. They ran the rules over US stocks from 1962 to 1996.
On Nasdaq stocks, returns in the days after all ten patterns differed from returns on ordinary days by more than chance would explain. On NYSE and AMEX stocks, five of the ten did.
The Lo, Mamaysky and Wang study did not test a trading strategy or its costs.
Which timeframe do chart patterns form on?
Chart patterns form on every timeframe. A double top on a daily chart takes weeks to form.
On a five-minute chart the same shape can form within a few hours.
The lessons use daily candles. Each candle is one day, so a top is a swing high: a day higher than the days on both sides of it.
A pattern is built from swing highs and lows. Its line often sits at a support or resistance level. Reading what each candle says about its day helps with both.
Where do the lesson charts come from?
The lesson charts are generated by Tradicted's chart generator and shown with no ticker and no dates. The candles that make the pattern are set by hand so each one matches its definition.
You cannot look up what happened next.
Most of the names are decades old. Robert Edwards and John Magee described the double top, head and shoulders, flags and triangles in Technical Analysis of Stock Trends, first published in 1948.
Start with double top and double bottom and mark where the first top turned.