Reversal patterns signal that a prevailing trend is losing steam and might be about to change direction. Think of them as the market taking a deep breath before heading the other way. They are usually formed over longer periods and represent a significant shift in market psychology from buying to selling, or vice versa.

The most classic reversal pattern is the Head and Shoulders formation. This pattern looks like a baseline with three peaks. The middle peak (the head) is the highest, and the two outside peaks (the shoulders) are lower and roughly equal in height.

Here’s the story it tells: An uptrend creates the left shoulder. A new, higher peak forms the head, but the subsequent pullback is significant. The market tries to rally again but fails to reach the previous high, forming the right shoulder. This failure to make a new high is a major red flag for bulls.

The line connecting the lows between the peaks is called the 'neckline'. A break below this neckline confirms the pattern and signals a potential trend reversal from up to down. The opposite pattern, an Inverse Head and Shoulders, signals a potential bottom and a shift from a downtrend to an uptrend.

To calculate the price target for a Head and Shoulders pattern, you use the measured move technique. Measure the vertical distance from the peak of the head down to the neckline. Then, project that same distance downwards from the point where the price breaks the neckline. This gives you an estimated target for the price decline. For an Inverse Head and Shoulders, you do the opposite, projecting the distance upwards from the breakout point.

Double and Triple Tops/Bottoms are simpler versions of the same concept. A Double Top forms after a strong uptrend and looks like the letter 'M'. The price hits a resistance level, pulls back, and then rallies to the same level again before falling. This shows that buyers couldn't push past that price point twice. A break below the low point between the two peaks confirms the reversal.

A Triple Top is similar but involves three failed attempts to break resistance, showing even stronger selling pressure. Double and Triple Bottoms are the bullish counterparts, look like a 'W' or an extended 'W', and signal a potential shift from a downtrend to an uptrend.

Continuation patterns suggest that the market is just taking a pause before continuing in its original direction. These are typically shorter-term formations than reversal patterns. Think of them as periods of consolidation or brief profit-taking within a larger, established trend.

Flags and Pennants are common and powerful continuation patterns. After a sharp price move (the 'flagpole'), the price consolidates in a small, compact range. If this range is rectangular and slopes against the trend, it's a Flag. If the range is a small, symmetrical triangle, it's a Pennant.

The story is simple: a strong trend is temporarily halted as some traders take profits. However, no significant selling or buying pressure emerges to reverse the trend. Once this brief consolidation period ends, the price often breaks out in the direction of the original trend with renewed force. The target is often calculated by taking the height of the flagpole and adding it to the breakout point.

The Cup and Handle is another well-known continuation pattern that signals bullish continuation. It forms a 'U' shape (the cup), followed by a slight downward drift (the handle). The 'U' shape indicates a period of consolidation where the price finds a bottom before gradually turning upwards. The handle is a final, smaller pullback before the price breaks out above the resistance formed by the rim of the cup.

This pattern is considered strong because the gradual 'U' shape shows a stable foundation is being built, rather than a sharp 'V' bottom which can be less reliable.

Finally, we have Wedges. A Rising Wedge forms when price action is contained within two upward-sloping trendlines that are converging. Although the price is making higher highs and higher lows, the narrowing range suggests that the upward momentum is fading. This is typically a bearish pattern that resolves with a breakdown. Conversely, a Falling Wedge has two downward-sloping, converging trendlines. It shows that sellers are losing steam and is typically a bullish pattern that resolves with a breakout to the upside.

Reading these patterns isn't just about spotting shapes. It's about understanding the story of the battle between buyers and sellers that each pattern tells. By combining this understanding with an analysis of volume and the overall market context, you can identify high-probability setups.