Free Trading School · Level 8: Chart Patterns
Why chart patterns work (sometimes)
Chart patterns are recurring shapes created by the tug of war between buyers and sellers. They work because many traders recognise them and act at the same places, and because they reflect real shifts in supply and demand: a series of lower highs, for example, shows sellers becoming more eager.
Patterns are probabilities, not promises. A pattern that "should" break up fails a meaningful share of the time. Professionals trade them with a defined stop, a realistic target and confirmation, never on the shape alone.
- Continuation patterns: a pause inside a trend before it resumes (flags, pennants, many triangles).
- Reversal patterns: the trend runs out of steam and turns (double tops and bottoms, head and shoulders).
- Confirmation: a close beyond the pattern's boundary, ideally with rising volume.
Trade the breakout of a pattern, not your guess about it. No close beyond the line, no trade.
Quick answers
Chart patterns are recurring shapes created by the tug of war between buyers and sellers. They work because many traders recognise them and act at the same places, and because they reflect real shifts in supply and demand: a series of lower highs, for example, shows sellers becoming more eager.
Trade the breakout of a pattern, not your guess about it. No close beyond the line, no trade.
Continuation pattern. Flags are pauses within a trend before it resumes.
Next lesson: Flags, pennants and triangles