Chart Patterns
Chart patterns are recurring geometric formations on price charts that technical analysts use to forecast future price direction. They are classified as continuation patterns (signaling the trend will resume) and reversal patterns (signaling the trend will change).
Last updated: 29 July 2026
Prerequisites
PrerequisitesThis sheet builds on the trends, support and resistance covered in "Trends, support and resistance" (ch. 2, Easy level). Trendlines, breakouts, pullbacks and the polarity principle all need to be understood before chart patterns will make sense.
Definition
DefinitionMurphy defines a chart pattern as a recognisable price configuration that forms on a chart and carries predictive value. In chapters 5 and 6 (1999 edition) he sorts patterns into two families:
Reversal patterns signal the end of a trend and the start of a new one in the opposite direction. There is one absolute precondition: a prior trend must exist to be reversed. Continuation patterns represent a temporary pause in the prevailing trend, a kind of rest before the move resumes. Murphy insists on two universal rules: volume must confirm the pattern (it expands in the direction of the breakout), and every pattern carries a measurable price objective derived from the height of the formation.
Why it matters
Murphy devotes three chapters to chart patterns because they are among the most concrete and operational tools in technical analysis. Unlike mathematical indicators, patterns are directly visible on the chart and supply clear signals: an entry point (the break), a price objective (the projected height) and an invalidation point (a return inside the pattern).
Murphy notes that patterns work partly because they are self-fulfilling: millions of traders worldwide watch the same formations and act the same way on the break. That convention effect amplifies the moves and gives patterns a statistical reliability beyond chance alone.
Key points
Every reversal pattern needs a prior trend to reverse. A head and shoulders inside a horizontal range has no predictive value whatsoever. Murphy is insistent: with no pre-existing trend, there is nothing to reverse
The price objective is calculated by measuring the height of the pattern (the distance from the highest peak to the neckline, in a head and shoulders) and projecting it from the break. That objective is a minimum, not a maximum
Volume is the arbiter: in topping reversal patterns, volume declines gradually during formation and explodes on the neckline break. Murphy notes that volume confirmation matters less for downside breaks, since markets fall under their own weight
Continuation patterns (flags, pennants, triangles) generally form faster than reversal patterns and typically appear halfway through a directional move — pauses that refresh the trend, in the chartists' standard image
The timing of a triangle breakout matters: a break coming in the final quarter of the triangle is less likely to produce a significant move. Murphy advises treating a triangle that drags on with suspicion
Harmonic patterns (Gartley, Bat, Butterfly, Crab) are the modern evolution of the classical formations. They combine pattern recognition with Fibonacci ratios to define ultra-precise entry zones. Scott Carney (Harmonic Trading, 2004) reports a 70-80% success rate on validated harmonic patterns, against 60-65% for the classical ones, thanks to the mathematical rigour of the ratios. Their complexity, however, requires a solid prior command of Fibonacci retracements (ch. 6)
Concrete example
ExamplesOne of the most famous head and shoulders formations in recent history built on the S&P 500 between July 2007 and August 2008. The left shoulder formed in July 2007 (~1,555), the head in October 2007 (~1,565 — the index's all-time record at the time and the highest point of the pattern), and the right shoulder in May 2008 (~1,426). The neckline sat around 1,260, joining the lows of January 2008 (~1,270) and March 2008 (~1,257). Its break in October 2008, on explosive volume (the Lehman Brothers collapse, bankruptcy filed 15 September 2008), triggered a 45% fall in five months. The pattern's theoretical objective: head-to-neckline height ≈ 305 points (1,565 − 1,260), projected below 1,260 → objective ≈ 955. The S&P reached 667 in March 2009, well beyond the minimum objective — consistent with Murphy's rule that the target is a floor, not a ceiling.
Common mistakes
CautionSeeing patterns everywhere (chartist pareidolia). Murphy warns that a valid pattern should leap off the chart: if you have to hunt for it, it probably is not there
Anticipating the break by taking a position before confirmation. Murphy recommends waiting for a close beyond the neckline or the triangle, not merely an intraday spike
Ignoring the timeframe: a pattern on the monthly chart has far greater impact and validity than one on the 5-minute. Murphy recommends prioritising daily and weekly charts
Forgetting the trend context: continuation patterns in the direction of the primary trend have a higher success rate than reversal patterns fighting it
Practical note
MurphyVolume is the lie detector of chart patterns — a point Murphy stresses. A head and shoulders neckline break without a significant expansion in volume is suspect and may well be a false breakout. He recommends confirming every break with volume at least 50% above the recent average, and applying the closing filter: a break has to be confirmed by a close beyond the level, not merely by an intraday spike.
📊 Tête et Épaules — Figure de retournement
Market impact
MarketsChart patterns on the major indices (S&P 500, FTSE 100, DAX) and on commodities (gold, crude oil) are watched by millions of traders and algorithms worldwide. Their self-fulfilling character amplifies the move once the pattern is confirmed. Head and shoulders formations and double tops and bottoms on weekly or monthly charts are the patterns most closely followed by fund managers and institutional analysts, and the price objectives derived from them find their way into the research notes of the major investment banks. That self-reinforcing dynamic is at once the strength and the limitation of pattern-based analysis.