Chart patterns: head and shoulders and triangles

Patterns are crowd psychology drawn on a chart

A chart pattern is a shape that price traces again and again. It repeats because people react to prices in similar ways: they remember where they bought, they regret missing a move, they panic when a level they trusted breaks. A pattern is not a law of physics. It is a summary of how the balance between buyers and sellers is shifting, and it gives you three practical things: a trigger level, a place where you are clearly wrong (the stop) and a rough target.

Patterns fall into two families:

• Reversal patterns suggest a trend is ending: head and shoulders, double tops and bottoms, wedges at the end of a move.
• Continuation patterns suggest a pause inside a trend: triangles, flags and pennants, cup and handle.

This lesson covers the two most famous ones in depth — head and shoulders and triangles. The vocabulary you learn here (neckline, measured move, retest, confirmation) is reused in every pattern lesson that follows.

Head and shoulders

Anatomy

A head and shoulders appears after an uptrend and has five parts:

1. Left shoulder — a peak inside the existing uptrend, followed by a normal pullback.
2. Head — a higher peak. The trend still looks healthy.
3. Right shoulder — a rally that fails below the head. This is the first lower high.
4. Neckline — the line through the two lows between the peaks. It can be flat or slightly sloped.
5. Break — a candle close below the neckline. Only now does the pattern exist.

Why it works

In the language of market structure, the uptrend made higher highs and higher lows (HH, HL) up to the head. The right shoulder is the first lower high (LH): buyers tried to push to a new high and couldn't. When the neckline breaks, the low between the head and the right shoulder is lost too — now there is a lower high and a lower low. Everyone who bought between the neckline and the head is at a loss. Some of them wait for price to come back so they can "get out at breakeven" — which is why price often returns to the neckline from below (the retest) and gets rejected there.

Worked example: the measured move

The left shoulder peaks at $110, the head at $120 and the right shoulder at $111. Both lows sit at $104 — that is the neckline.

• Height = head − neckline = $120 − $104 = $16.
• Measured move target = neckline − height = $104 − $16 = $88, about 15% below the neckline.

Look at the volume pane too: volume was strong on the rally to the left shoulder, weaker on the rally to the head and weakest on the right shoulder — enthusiasm was fading while price was still rising. On the break it spiked (the amber bar). A neckline break on heavy volume is more convincing than one on a quiet day.

How we use it (the halal approach)

In this course we don't short sell, so a head and shoulders is not an entry — it is an exit and protection signal for shares you already hold: