Dean Cross

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Chart Patterns

Head and Shoulders, Double Tops, Triangles, Wedges and Flags in Stock Trading — What Really Happens After the Break

You spotted the pattern. What does price really do next?

Head and shoulders. Double tops. Triangles, wedges and flags. Every trading book teaches the same shapes and the same rules: wait for the break, measure the target, put the stop at the far end. Almost nobody checks what price actually does after the pattern forms.

This book does. More than 32,000 chart patterns were found by one fixed set of rules on 3,399 American stocks across more than twenty years of market history, including more than 1,600 companies that failed or were bought out. Each one was counted from the day a trader could first see it, not from the break, so you see the whole picture, including the patterns textbook tables leave out.

The good news: much of what you've been taught holds up.

  • Wait for the break. About half of head and shoulders tops, and six double tops in ten, never broke the line at all.
  • Expect the throwback. About four head and shoulders and double top breaks in five came back to the pattern line.
  • Bottoms beat tops. Inverse head and shoulders reached the measured target after 62 percent of breaks, against 46 percent for tops. Double bottoms: 71 percent against 63.
  • Wedges break the way the book says. Rising wedges broke down 74 percent of the time, and falling wedges broke up 82 percent.
  • Flags move fast. Breaks typically came within two or three days, and most kept going.

And some of it will surprise you. Ascending triangles broke down more often than up. Descending triangles broke up two times in three. One simple rule explains why, and it explains wedges too.

What you'll be able to do:

  • Stop acting on patterns that never finish. Know the difference between a pattern that has formed and one that has broken, and what to do while you wait.
  • Read any triangle or wedge by the one line price usually breaks.
  • Set targets price actually reaches. Measure a pattern's height in ordinary days, and take part of the profit at a mark price reached about three times in four.
  • Place stops that survive ordinary noise. A stop tucked just past the pattern line was hit 7 times in 10, and in more than a quarter of all trades price went on to the target after the stop was hit.
  • Know which breakouts to trust. Heavy volume on the break made breaks sturdier. Find out why that isn't special to patterns.
  • Size every position to its stop, so no single pattern can do real damage.
  • Follow a routine you can run on any chart in a few minutes.

Clear, practical and written in plain English. Part I teaches each pattern step by step, the way traders learn them. Part II shows what price actually did after them. Part III turns the findings into stops, targets and a routine. Thirty-five charts and diagrams make every idea easy to see.

Whether you're learning your first head and shoulders or you've traded patterns for years and wondered why they don't always work the way the books promise, this book shows you what to expect after the break, and how to plan for it.

Part of the Reading the Chart Series. For educational purposes only; not financial advice.

Look inside

A few pages from the paperback. Select a page to see it full size.

  • The contents
  • The opening of Chapter 1
  • Figure 2.1: a head and shoulders top
  • Figure 8.1: a real head and shoulders in NVIDIA

Who it's for

Traders learning their first head and shoulders, and experienced pattern traders who have wondered why the patterns don't always work the way the books promise.

Where to go next

PaperbackKindleHardcover