Open any technical analysis book and you'll find dozens of chart patterns. Head and shoulders, double tops, triangles, wedges, flags, pennants, cups and handles, diamond patterns, broadening formations...
The truth? Most of them are useless. Either they don't occur often enough to matter, or they fail as often as they work.
Here are the patterns that actually provide an edge - and why most of the others belong in the trash.
Why Most Patterns Fail
Before we cover what works, let's understand why most patterns don't:
Subjectivity: Is that a head and shoulders or just a three-swing pullback? Ten traders will draw ten different patterns on the same chart. If a pattern can be seen different ways, it can't be traded systematically.
Sample size: "Rare" patterns like diamonds or triple tops might appear once every few months on a given chart. You can't develop conviction in something you rarely see.
Selection bias: Pattern books show perfect examples. Real charts are messy. That textbook double bottom looks nothing like the sloppy structure you're staring at right now.
No edge: Some patterns are essentially random. They "work" 50% of the time because that's what random price movement does.
Patterns That Work: The Short List
1. Consolidation Breakouts (Flags and Triangles)
After a strong move, price pauses. It consolidates in a tight range - a flag (rectangular) or triangle (converging). Then it breaks out and continues in the original direction.
Why it works: Consolidation after a move represents a pause, not a reversal. Traders who missed the first move use the pause to enter. When they do, the move continues.
How to trade it:
- Wait for a clear preceding trend (the "flagpole")
- Identify tight consolidation (3-10 candles typically)
- Enter on breakout in the direction of the original trend
- Stop below the consolidation low (for bullish) or above consolidation high (for bearish)
- Target: measure the flagpole and project it from the breakout point
Success rate: High when the preceding trend is strong and the consolidation is tight. Fails when consolidation is too long or too wide.
2. Double Top / Double Bottom
Price reaches a level twice and fails to break through. On the second failure, it reverses.
Why it works: The first test establishes the level. The second test confirms that sellers (at tops) or buyers (at bottoms) defend it. Two tests = strong level.
How to trade it:
- First test creates the level
- Pullback creates the "neckline"
- Second test fails to break the first high/low
- Entry: break of the neckline, OR second test rejection with confirmation
- Stop: beyond the double top/bottom
- Target: measure the pattern height and project from neckline
Key point: The second test should show clear rejection - a long wick, a reversal candle, or weakening momentum. Without rejection, it might break through on a third test.
3. Support/Resistance Flip
Old support becomes new resistance. Old resistance becomes new support. When price breaks a level and pulls back to test it, the test often holds.
Why it works: Traders who bought at support are now underwater when it breaks. Their sell orders (to cut losses) cluster at the old support level, now resistance. This creates selling pressure on the retest.
How to trade it:
- Identify a clear level that held multiple times
- Wait for a decisive break (not a wick through, but a close beyond)
- Wait for price to return and test the broken level
- Enter on rejection at the retest
- Stop: beyond the level (allowing for slight overshoot)
Success rate: Very high when the original level was significant and the break was clean. Fails when the break was marginal or the level was weak.
4. Higher Low in Uptrend / Lower High in Downtrend
In an uptrend, price pulls back but finds support above the previous low. That higher low is a continuation signal. Vice versa for downtrends.
Why it works: This is trend structure. A higher low means buyers stepped in earlier than before - they're eager. It confirms the trend is healthy.
How to trade it:
- Confirm the trend is intact (higher highs AND higher lows)
- Wait for a pullback after a swing high
- Watch for price to hold above the previous swing low
- Enter on reversal signal (bullish candle, momentum shift)
- Stop: below the higher low
- Target: previous high or measured move
Patterns to Avoid
Head and Shoulders: Classic, famous, and highly subjective. Where exactly is the neckline? When is it confirmed? By the time most traders identify it, the move is over.
Wedges: Rising wedge, falling wedge - they look great in textbooks. In reality, they break both directions with similar frequency.
Complex patterns: Triple tops, diamonds, broadening formations. They're too rare and too subjective to develop any skill in trading them.
Cup and Handle: Beautiful when it works, but the "handle" can take forever to form, and false breakouts are common.
This doesn't mean these patterns never work. It means the edge is marginal, and you're better off focusing on simpler, more reliable setups.
The Real Key: Context
A pattern alone is not a trade. The same pattern can be a strong signal in one context and meaningless noise in another.
Trend context: A bullish flag in an uptrend is high probability. A bullish flag in a downtrend is a trap.
Level context: A double bottom at major support is significant. A double bottom in the middle of nowhere is noise.
Volume context: Breakouts with expanding volume follow through. Breakouts with declining volume often fail.
Timeframe context: A pattern on the 5-minute chart means little if the daily chart is in a strong opposing trend.
Before trading any pattern, ask: Does the context support this trade? If the trend, the level, and the volume all align with your pattern, take it. If not, skip it.
The Bottom Line
Chart patterns can work, but most traders overcomplicate them. Stick to the reliable ones: consolidation breakouts, double tops/bottoms, support/resistance flips, and trend continuation patterns.
Forget the exotic patterns. Focus on context. A simple pattern at a significant level with volume confirmation will outperform a "perfect" complex pattern in no-man's-land.
Patterns are tools. Like all tools, they work when used correctly - and break things when used poorly.
Patterns are just price structures. The question is: what phase of the cycle is this structure occurring in?
A consolidation breakout during markup phase has very different odds than the same pattern during distribution. Signal Pilot's Pentarch maps cycle phases so you know whether your pattern has wind at its back - or is sailing into a headwind.
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