Chart Patterns – Spotting Setups in the Market

Chart patterns form when price movements create recognizable shapes on a chart. These patterns reflect the psychology of traders and investors — fear, greed, hesitation — and can often signal what might happen next.

Chart patterns are typically grouped into two main types:

1. Reversal Patterns – Signal a possible change in trend direction

2. Continuation Patterns – Suggest the trend is likely to continue after a pause

Let’s look at the most popular patterns — all of which we’ll explore in more detail later.

1. Double Top & Double Bottom

Double Top (Reversal – Bearish)

• Price hits a high twice, with a dip in between

• Fails to break the high both times

• Often followed by a price drop

Suggests buyers are losing strength and sellers may take control

Double Bottom (Reversal – Bullish)

• Price drops to the same low twice, with a bounce in between

• Can signal the end of a downtrend and start of an uptrend

Shows selling pressure is weakening and buyers are stepping in

2. Head and Shoulders / Inverse Head and Shoulders

Head and Shoulders (Reversal – Bearish)

• Three peaks: left shoulder, higher head, and right shoulder

• A neckline connects the lows between the peaks

• Break below the neckline = sell signal

Indicates a trend reversal from up to down

Inverse Head and Shoulders (Reversal – Bullish)

• Opposite shape, found at the bottom of a downtrend

• Break above neckline = buy signal

3. Triangles (Continuation or Reversal)

Ascending Triangle (Usually Bullish)

• Flat top (resistance) with rising lows (support)

• Suggests upward breakout likely

Descending Triangle (Usually Bearish)

• Flat bottom (support) with lower highs

• Suggests downward breakout likely

Symmetrical Triangle

• Converging highs and lows

• Direction of breakout depends on prior trend

4. Flags and Pennants (Continuation)

Bear Flag / Bull Flag

• Sharp price move (the “flagpole”) followed by a tight, sloping rectangle (the “flag”)

• When price breaks out of the flag, it often continues in the same direction

Pennant

• Similar to a flag, but with converging trendlines

• Short pause before continuation

Often forms after strong momentum moves, especially on high volume

5. Cup and Handle (Continuation – Bullish)

One of the most reliable and famous bullish patterns.

• Cup: A rounded, U-shaped bottom

• Handle: A short dip or sideways movement after the cup

• Breakout: Price breaks out above the resistance line (the rim of the cup)

Shows a period of accumulation, a short-term pullback, and then strong buying pressure

Works best in strong uptrends, and on longer timeframes (daily/weekly charts)

Tips for Using Chart Patterns

• Patterns are not guarantees — use them with volume, trendlines, and momentum indicators for confirmation

• Watch for fake breakouts (price breaks the pattern but quickly reverses)

• Patterns work best when they align with the overall market trend

Summary – Key Chart Patterns at a Glance