Welcome to the high-stakes theater of the financial markets. To the untrained eye, a trading chart looks like a heart monitor for a squirrel on an espresso binge. But to a Price Action trader, those red and green candles are telling a story—a saga of greed, fear, and the eternal struggle between bulls (the optimists) and bears (the pessimists).
Recognizing price action patterns is essentially learning the “body language” of the market. If you can read the posture, you can predict the move. Here are the classic formations that every trader needs to know before they lose their shirt (or buy a yacht).
1. The Head and Shoulders: The Drama Queen
The Head and Shoulders is perhaps the most famous reversal pattern in existence. It’s the market’s way of saying, “I’ve tried my best, I’m exhausted, and I need a very long nap.”
The Left Shoulder: A peak followed by a dip.1
The Head: A higher peak (the peak of optimism).
The Right Shoulder: A lower peak that fails to reach the height of the head.2
The “Neckline” is the support level connecting the lows.3 When the price breaks below this line, it’s a signal that the trend has snapped.
Pro Tip: Don’t get ahead of yourself. A Head and Shoulders is just a “cool drawing” until the price actually breaks the neckline. Patience is the difference between a profit and a facepalm.
2. Double Tops and Bottoms: The “Fool Me Twice” Pattern
Imagine you’re trying to kick down a door. You run at it once—thud—it doesn’t budge. You try again with more force—thud—still nothing. You eventually give up and walk away. That is a Double Top.
The price hits a resistance level twice and fails to break through, forming an “M” shape. Conversely, a Double Bottom forms a “W” shape, suggesting the bears have run out of steam and the price is about to bounce.4
Price Target Calculation
To estimate how far the price might fall after a Double Top, traders often use a simple formula:
3. The Triangles: The Pressure Cookers
Triangles occur when the market gets indecisive.5 The price range narrows, the candles get smaller, and the tension builds until the whole thing explodes like a shaken soda can.
| Triangle Type | Visual Cue | Market Sentiment |
| Ascending | Flat top, rising bottom | Buyers are getting aggressive; a breakout upward is likely. |
| Descending | Flat bottom, falling top | Sellers are in control; a breakout downward is likely. |
| Symmetrical | Both sides closing in | A literal coin flip. Wait for the breakout to see who won the fight. |
The Reality Check: Beware the “Fakeout”
Before you go all-in on a perfect Symmetrical Triangle, remember that the market is a prankster. Sometimes the price will peek outside of a pattern, wave hello, and then immediately sprint back in the opposite direction. This is why we use Stop Losses—the financial equivalent of a “safety net” for when your chart-reading genius is temporarily overruled by market chaos.
Mastering these patterns won’t give you a psychic’s crystal ball, but it will give you a map. And in the wilderness of the markets, a map is the only thing standing between you and a very expensive lesson.
Would you like me to create a guide on how to combine these patterns with “Volume” indicators to confirm if a breakout is real or a trap?
Ever feel like the stock market is just a chaotic mess of jagged lines drawn by a toddler on a sugar high? You’re not alone. But seasoned traders look at those charts and see something else: Price Action Patterns. Think of price action as the “body language” of the market. Just as you can tell your friend is lying about liking your sourdough starter by the way their left eyebrow twitches, traders can tell a market is about to crash by the way it wiggles.
The Head and Shoulders: The Market’s Bad Posture
The undisputed heavyweight champion of price action patterns is the Head and Shoulders. It sounds like a dandruff shampoo, but in the trading world, it’s a warning sign that the party is officially over.
Anatomy of a Meltdown
Imagine a mountain range with three peaks.
The Left Shoulder: The market climbs, hits a peak, and dips back down. Everyone is happy. “To the moon!” they cry.
The Head: The market rallies again, even higher this time! It’s the king of the world! Then, it falls back down to the same level as the first dip. Panic starts to set in.
The Right Shoulder: One last, pathetic attempt to rally. It fails to reach the height of the “Head,” showing that the buyers have run out of steam.
When the price drops below the “Neckline” (the imaginary line connecting the two low points), it’s the market’s way of saying, “I’m tired, I’m going home.” —
Double Tops and Bottoms: The “I Can’t Decide” Pattern
Then we have the Double Top. This is the market’s version of trying to open a jar, failing, trying one more time with a towel, failing again, and then just giving up and ordering takeout.
Double Top (The M-Shape): The price hits a high level twice and fails to break through both times. It’s a classic reversal signal.
Double Bottom (The W-Shape): The opposite. The price hits a low, bounces, hits that low again, and refuses to go further. This is the market finding its backbone.
The Flags and Pennants: The Mid-Race Nap
Not every pattern means the trend is ending. Sometimes the market just needs a snack. Flags and Pennants are “continuation patterns.” After a massive vertical move (the flagpole), the price consolidates into a small rectangle (a flag) or a tiny triangle (a pennant).
It looks like the market is taking a breather before sprinting another five miles. If you see a flag, don’t bet against the trend—the bulls are just reloading their cannons.
Why Should You Care?
Patterns work because they represent human psychology. Greed, fear, and indecision haven’t changed since the 1700s. We are predictable creatures. When a Head and Shoulders forms, it’s not magic; it’s a visual representation of thousands of people collectively losing their nerve.
The Golden Rule: Never trade on patterns alone. A “Head” might just be a “Left Shoulder” in disguise, and the market loves to play pranks. Always wait for the breakout (the confirmation) before you put your hard-earned lunch money on the line.
Would you like me to explain how to set “Stop Loss” orders so a failed pattern doesn’t turn your portfolio into a tragedy?
