Waves and chart patterns: head and shoulders, double tops, triangles and flags

Watch charts for a few months and you will notice certain shapes appearing over and over. The reason is crowd psychology: people make similar decisions in similar situations.

Markets move in waves

Every trend is built from impulse waves in the trend's direction and corrective waves against it. Impulses are usually longer and faster; corrections slower and choppier. Recognising this rhythm helps you enter during the correction, not at the end of the move.

Reversal patterns

Head and shoulders: three peaks with the middle one highest. The neckline runs through the lows between them. A neckline break is a sell signal, with a target roughly equal to the distance from the head to the neckline. The inverse version at lows is bullish.

Double top and double bottom (M and W): price reaches the same level twice and fails to break it. A break of the middle low in an M (or middle high in a W) activates the pattern. Sometimes the second top pokes slightly above the first and sweeps liquidity, an even stronger version.

Continuation patterns

Flag: a sharp move (the pole) followed by a short pullback in a small counter-trend channel. A flag breakout often produces a move similar in size to the pole.

Triangle: symmetrical, ascending or descending. Price compresses and eventually breaks one side. An ascending triangle (flat top, rising lows) more often breaks higher.

Wedge: like a triangle but with both lines sloping the same way. A rising wedge often breaks down and a falling wedge up.

Golden rules

1. A pattern is not a pattern until it breaks; wait for a candle close beyond the line.
2. Location matters; a double top at higher-timeframe resistance is far more reliable.
3. Check the pattern target against Fibonacci levels and support and resistance.

The book reviews more than 137 real examples of these patterns on gold and currency pairs with before-and-after charts.

📘 This article summarises ideas from our book "Fibonacci Chart Strategy", with 22 chapters and 137 real before-and-after examples. To get the book, message us on Telegram @fibonacci_chart.

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Trading financial markets involves risk. This article is educational and is not investment advice.