Chart school · lesson 7 of 10

Reversal chart patterns: head and shoulders, double tops, wedges

A chart pattern is a shape drawn by many candles. Reversal patterns are the shapes a price tends to draw when a trend is running out.

The 9 drawings Check yourself

The idea

These shapes take dozens of candles to form, and they are made of the things in lessons 5 and 6: swings, and levels where the price turned. A head and shoulders is simply an uptrend that stopped making higher highs.

Every one of them has a line that completes it, usually called the neckline. Until the price closes beyond that line, the pattern is unfinished, and unfinished patterns dissolve back into the trend very often.

7.1Usually read as bearish

Head and shoulders

What it looks like: After a rise: a peak, a higher peak, then a lower peak. The neckline joins the two dips between them. The pattern is complete only when the price closes below the neckline.
What traders read into it: The right shoulder is a lower high: buyers could not reach the previous peak. A break of the neckline adds a lower low. Traders read the two together as the uptrend ending.
Where it fails: Seeing it before it exists. Three bumps in a row are everywhere. Without a preceding uptrend and a close through the neckline, it is not the pattern, and even completed ones regularly reverse back.

Head and shoulders, in the pattern library

7.2Usually read as bullish

Inverse head and shoulders

What it looks like: The same shape upside down, after a fall: a low, a lower low, then a higher low. The neckline joins the two bounces. It completes on a close above the neckline.
What traders read into it: The right shoulder is a higher low: sellers could not reach the previous trough. Traders read a break of the neckline as the downtrend ending.
Where it fails: The same as its twin. An unfinished pattern is only a downtrend with a bounce in it, and a break of the neckline that cannot hold is a common trap.

Inverse head and shoulders, in the pattern library

7.3Usually read as bearish

Double top

What it looks like: After a rise, the price reaches a high, pulls back, and returns to about the same high without passing it. The shape is an M. It completes when the price closes below the low between the peaks.
What traders read into it: Buyers failed twice at the same price. Traders read the second failure, and then the break of the middle low, as resistance winning.
Where it fails: Until the middle low breaks, a double top is identical to an uptrend pausing under resistance, which usually goes on to break it.

The double top, in the pattern library

7.4Usually read as bullish

Double bottom

What it looks like: After a fall, the price reaches a low, bounces, and returns to about the same low without passing it. The shape is a W. It completes on a close above the high between the lows.
What traders read into it: Sellers failed twice at the same price. Traders read the second failure and the break of the middle high as support winning.
Where it fails: Buying the second low before anything has completed. In a downtrend a second low is frequently followed by a third, lower one.

The double bottom, in the pattern library

7.5Usually read as bearish

Triple top

What it looks like: Three peaks at about the same height, with two dips between them. It completes when the price closes below the dips.
What traders read into it: Three failures at one price. Traders read it as a resistance level that buyers could not get through, followed by support giving way.
Where it fails: Before it breaks down, a triple top is a range with a flat top. A flat top that is tested again and again may just as well be about to break upwards.

The triple top, in the pattern library

7.6Usually read as bullish

Triple bottom

What it looks like: Three lows at about the same depth, with two bounces between them. It completes when the price closes above the bounces.
What traders read into it: Three failures by sellers at one price. Traders read it as a support level holding, followed by resistance giving way.
Where it fails: Until it breaks upwards it is a range. A support level tested three times in a row has also been weakened three times.

7.7Usually read as bullish

Rounding bottom

What it looks like: A long, gradual curve: the fall slows, the price drifts sideways along the bottom, and the rise slowly gathers pace. There is no single turning point. It is also called a saucer.
What traders read into it: Selling faded out gradually and buying returned gradually. Traders read it as a slow change of opinion.
Where it fails: It takes so long to form that it is usually only clear when it is nearly over. Along the flat bottom, it cannot be told apart from a pause before a further fall.

The rounding bottom, in the pattern library

7.8Usually read as bearish

Rising wedge

What it looks like: The price rises between two upward-sloping lines that converge. The lows climb faster than the highs, so each new high gains less than the last.
What traders read into it: The price is still rising, with less and less progress on each push. Traders read the shrinking gains as buying running out, and watch for a break of the lower line.
Where it fails: A wedge can be redrawn several times as it forms, and the price can keep rising inside it far longer than seems reasonable. Wedges also break upwards.

The rising wedge, in the pattern library

7.9Usually read as bullish

Falling wedge

What it looks like: The price falls between two downward-sloping lines that converge. The highs drop faster than the lows, so each new low gains less ground than the last.
What traders read into it: The price is still falling, with less progress on each push. Traders read the shrinking falls as selling running out, and watch for a break of the upper line.
Where it fails: The price can grind lower inside the wedge for a long time. Acting before the upper line has broken means buying in a downtrend.

The falling wedge, in the pattern library

SimulationEvery drawing is invented to show a shape as plainly as possible. None of them is a market, and a real chart is rarely this tidy. Educational information, not investment advice or a recommendation to trade.

To carry away

Lesson 7, in four lines.

01
A reversal pattern needs a trend to reverse. Without one it is only a shape.
02
Each pattern is complete only on a close beyond its neckline or its line.
03
Tops are made of failed highs; bottoms are made of failed lows.
04
Completed patterns fail too. A pattern describes what has happened, not what must follow.

Check yourself

Three questions on this lesson.

Choose an answer and press Check. You can try each as often as you like. No answer is stored, nothing is sent anywhere and no score is kept.

Question 1 of 3
When is a head and shoulders pattern complete?
When the right shoulder formsWhen the price closes below the necklineWhen the head is higher than the shoulders
Question 2 of 3
What does a double top look like before the middle low breaks?
An uptrend pausing under resistanceA downtrendA head and shoulders
Question 3 of 3
In a rising wedge, what is happening to each new high?
It gains more than the lastIt is lower than the lastIt gains less than the last

An explanation for study. It is not advice, a recommendation or a forecast. No pattern is reliable on its own, and a shape described here says nothing certain about what a price will do next.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

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The idea of this lesson

Lesson 7, in four lines.

Three questions on this lesson.

The idea of this lesson

Lesson 7, in four lines.

Three questions on this lesson.