Price Patterns: Continuation and Reversal

A price pattern is support and resistance with a shape

You already know support — a price area where buying has repeatedly stopped a decline — and resistance, a price area where selling has repeatedly stopped an advance. So far you've drawn those as flat lines: a floor and a ceiling.

They don't have to be flat. Sometimes the floor rises while the ceiling holds. Sometimes both tilt toward each other. When support and resistance take angles instead of sitting level, the space between them makes a shape, and traders have names for the common ones. That's all a price pattern is: the outline of where buyers and sellers keep meeting, drawn over a stretch of time.

Do not try to memorize the names. There are dozens, new ones get invented every year, and the name is the least useful part. What matters is the story each shape tells about supply and demand — who is pressing, who is absorbing, and who runs out first.

Consolidation: the part where nobody knows

Almost every pattern in this lesson forms during consolidation — a stretch where price stops trending and moves sideways in a range. Consolidation is what indecision looks like on a chart. The stock had a direction; now it doesn't; the range is buyers and sellers trading the same shares back and forth at roughly the same prices while the argument gets settled.

Patterns are sorted into two families by what they suggest happens when the argument ends:

• A continuation pattern suggests the trend that was running before the pause picks back up.
• A reversal pattern suggests the trend is finished and turns the other way.

Here is the honest and slightly deflating truth, and the source of most of the trouble: while the sideways move is happening, you don't know which one you're looking at. The same range can end up labeled a continuation pattern or a reversal pattern depending entirely on which side price eventually leaves through. The label arrives with the breakout — price moving decisively through support or resistance — and not one minute earlier. Anyone who tells you a pattern is a continuation pattern before it resolves is telling you what they hope.

Triangles: the range that runs out of room

Video coming soon

This lesson explains the idea in full without it.

A triangle is a consolidation where support or resistance, or both, run at an angle, so the range gets narrower as it goes. Draw a line connecting the highs and a line connecting the lows, and the two lines lean toward each other. Extended far enough right, they'd cross at a point — the apex. Draw a third line straight up the left side, where the pattern is widest, and you have the base.

The supply-and-demand story is the whole point. In a symmetrical triangle — highs stepping lower, lows stepping higher — sellers are willing to sell at lower and lower prices while buyers are willing to buy at higher and higher ones. Both sides are getting more urgent and the room between them is shrinking. Somebody is about to run out of shares or out of patience, and when they do, price leaves the range fast, because nothing is left to slow it down.

Different tilts tell different versions:

• Ascending triangle — a flat ceiling with a rising floor. Sellers keep defending one specific price. Buyers keep paying more to reach it. Demand is pressing against fixed supply.
• Descending triangle — a flat floor with a falling ceiling. Buyers keep defending one specific price while sellers accept less and less to get out. Supply is pressing against fixed demand.
• Symmetrical triangle — both sides tightening. No fixed line; just compression.

A pennant is the same thing on a short clock: a triangle that forms over a brief window rather than months. Short pennants form and resolve quickly, which means more chances to trade and less time to think about each one.

Figure

Chart-reading folklore says a triangle tends to resolve before price squeezes all the way into the apex, rather than tightening to a literal point. That's a common observation, not a measured rule, and we're not going to dress it up as one. The useful version is structural: the further into the triangle price travels without breaking out, the less room the pattern has left, and a triangle that grinds to its tip has stopped telling you anything.

Trading a triangle: entry, target, and the line that says you were wrong

A plan built on triangles is short. Wait for the pattern to resolve — the entry rule is a break of support or resistance, in the direction the trend was already going if you're treating it as a continuation. Then measure the base, and project that same distance from the point where price broke out. That's your price target: the distance the pattern was wide, transferred to where it broke.

Work it with a fictional stock. XYZ has been in a downtrend. It pauses and coils into a symmetrical triangle. At the pattern's widest, the left edge, the range runs from $56 down to $50 — a base of $6. Price then breaks support at $50.

Target: $50 − $6 = $44.

That's it. The math is not the hard part and it is not the clever part. And notice what you just did: you identified a trend, drew support and resistance, entered on a break, and set a target by measuring a height and subtracting it. That is exactly the support-and-resistance procedure you already learned. The pattern didn't add a new power. It made the lines easier to see.

Now the part the shape actually earns its keep for. Before you enter, you know where you're wrong: if price breaks back into the triangle and out the other side, the story you told yourself is dead. Write that level down first. A stop-loss order — a standing order to sell if price reaches a set level, capping the loss — placed just beyond the far side of the pattern is how you make the invalidation real instead of a good intention. Pick the distance in advance and put it in your plan; deciding it while you're losing money is not deciding.

Double tops: buyers who couldn't do it again

Now the other family. A reversal pattern is only complete once the trend has actually turned — which is worth saying twice, because it means the pattern's own definition depends on the outcome you were hoping to predict.

The plainest one is the double top. A stock is in an uptrend, which means it's been making higher highs. It rallies, pulls back, then rallies again — and this time it stops at roughly the same price as the last high instead of exceeding it. Two peaks, about level, with a valley between them.

Read the supply-and-demand story rather than the picture. An uptrend continues because buyers keep paying more than the last buyer did. At that second peak, they didn't. Demand showed up and it wasn't enough; the same supply that stopped the first rally stopped the second one. That's the information. The shape is just how it looks.

But the two peaks are not the pattern. The pattern is not complete — and gives no signal — until price breaks the support at the bottom of the valley between them. Until then you're looking at a stock that had a bad day near an old high, which happens constantly in trends that go on to make new highs anyway.

Figure

The target works the same way as the triangle, because it's the same idea: measure the pattern, project it from the break. Say fictional XYZ tops twice at resistance near $60, with valley support at $54. The height is $6. Price breaks $54, so the short-term target is $54 − $6 = $48.

And the invalidation is just as clean: if price climbs back above the second peak, there was no double top. There were two highs and then a third, higher one — which is the definition of the uptrend continuing. You were wrong, you find out cheaply, you move on.

Volume is a supporting witness here, not a verdict. A breakdown on unusually heavy volume means a lot of shares changed hands to make that move — more people acting on it. It's a stronger version of the same story, not proof. Breakouts happen on ordinary volume all the time.

Other reversal shapes, and the head and shoulders

The head-and-shoulders pattern is the famous one, and you should be able to picture it from words alone. In an uptrend: price makes a high (the left shoulder), pulls back, makes a higher high (the head), pulls back to about the same level as the first pullback, then rallies again and makes a lower high (the right shoulder). Draw a line under the two pullback lows — that's the neckline, this pattern's support. The pattern completes when price breaks the neckline.

The story underneath: the uptrend's engine was buyers repeatedly overpowering sellers. At the head they managed it one last time. At the right shoulder they couldn't get back to the head's price. The rally is running on less each time. The neckline break is the floor those pullbacks had been holding finally giving way. Its target is measured the same as everything else here — the distance from the head down to the neckline, projected down from the break. Flipped upside down in a downtrend, the same shape is called an inverse head and shoulders and says the mirror-image thing about sellers.

Every one of these is the same sentence in different handwriting: one side stopped being able to push, and the level that had been holding broke. Once you can hear that sentence, you don't need the catalog.

Read the last column first. It is the only column that protects you.

When patterns fail — which they do, routinely

Take XYZ's triangle from earlier. It breaks support at $50 with the trend, exactly as a continuation pattern is supposed to. Two days later it's back at $52, inside the triangle, and then through the top of it. Your target of $44 never mattered. What mattered was that you wrote down where you were wrong and had a stop-loss order sitting there.

That's the failure case working as designed. You didn't avoid being wrong — nobody does — you just made being wrong cheap. Compare it to entering because the shape looked right, with no invalidation level, and then negotiating with yourself the whole way down. Same pattern, same failure, wildly different outcome.

There's a useful move available when a pattern fails, too: a failed continuation is itself information. If a stock in an uptrend coils up, and then breaks down out of the coil, the thing you learned is that demand couldn't carry it. Some traders take the failure as the signal and trade the other direction. That's not a trick to recover a losing trade — it's a new trade with its own entry, its own target, and its own invalidation level, and it earns those honestly or it doesn't get taken.

Key takeaways

• A price pattern is just support and resistance drawn at angles. The shapes have names, but the name is the least useful part — the useful part is the story about who's buying, who's selling, and who runs out first.
• Continuation patterns suggest the old trend resumes; reversal patterns suggest it turns. While the sideways move is still happening you cannot tell which one you have. The breakout assigns the label, not you.
• Every pattern in this lesson uses the same procedure: identify the trend, draw the lines, enter on the break, measure the pattern's height and project it from the breakout for a target.
• The invalidation level is the part that matters. Write down what price would do to prove your read wrong before you enter, and place a stop-loss order there. A pattern without an invalidation point is a prediction; with one, it's a testable idea.
• Patterns fail routinely, and nobody can tell you how often. Be suspicious of any source that attaches a success rate to a shape — and of your own memory, which keeps the patterns that worked and quietly discards the rest.