Chart patterns are recurring shapes that price traces out on a chart — formed by the interaction of support, resistance, and trend — which technical analysts group into recognizable families and treat as setups for a directional trade. The classic workflow is the same across the family: the price consolidates into a defined shape, a breakout through one of its boundaries triggers entry, the opposite boundary defines invalidation, and the pattern's height (its "measured move") projects a target. The core tension is that the shapes are intuitive and visually compelling but their identification is subjective and their measured edge is far weaker than their folklore reputation suggests. This node defines the families and routes to the children that detail each; it does not re-derive the individual setups.

The two families

Patterns are conventionally split by what they predict relative to the prior trend:

• Reversal patterns form after a sustained move and signal that the trend is exhausting and may turn. Because reversing an established trend requires accumulating opposing pressure, these tend to take longer to build. → Reversal Patterns child covers Head & Shoulders (and its inverse) and the Double Top/Bottom.
• Continuation patterns form within a trend as a pause or consolidation, and predict resumption in the trend's existing direction. → Continuation Patterns child covers Flags, Pennants, and Triangles (ascending, descending, symmetrical).

Two further children sit alongside this split because they don't fit it cleanly: Cup & Handle (William O'Neil's signature base, usually a continuation/bullish-base structure) and Rounding & Wedges (rounding bottoms/tops, plus rising and falling wedges, which can act as either reversal or continuation depending on context).

How they're traded

Every pattern in this branch is operated through the same three primitives, so they're worth defining once here:

1. Breakout — the entry trigger: price closing decisively beyond a pattern boundary (a neckline, trendline, or flag edge). A breakout that fails and reverses back through the boundary ("throwback" up-breakouts, "pullback" down-breakouts in Bulkowski's terminology) is the dominant failure mode. 2. Invalidation — the opposite boundary or the pattern's structural low/high, defining where the hypothesis is wrong and the stop sits. 3. Measured move (target) — project the pattern's height from the breakout point. For a head-and-shoulders, the head-to-neckline distance; for a flag, the prior "flagpole." This is a rule-of-thumb projection, not a guarantee.

The swing-specific operational mechanics (exact entry trigger, stop placement, partial exits, hold period) live in the Swing Trading branch — this branch defines the structures, not the trade management.

Standing & evidence — read this carefully

This is the part most pattern material omits, and it matters more than the shapes themselves.

The only credible source of measured pattern hit-rates is Thomas Bulkowski's Encyclopedia of Chart Patterns, who tabulated break-even failure rates and average post-breakout moves across tens of thousands of samples. By his published figures, the best performers include the high-and-tight flag (he reports the strongest average rise and a notably low failure rate) and, among reversals, the head-and-shoulders top/bottom ranks comparatively well; the much-promoted cup-and-handle ranked outside his top ten on the metric he used, and broadening patterns and wedges tend to rank toward the bottom (Bulkowski, Best Performing Chart Patterns; thepatternsite.com).

Crucial honest caveats, several of which Bulkowski himself states:

• Selection bias. The book's statistics come from patterns Bulkowski hand-selected as clean, "ideal" examples. Real-world charts are messier; a human (or screener) finding patterns in real time will pick worse instances, so realized performance runs below the textbook numbers.
• Subjective identification. There is no objective definition of most patterns — a critique even sympathetic reviewers raise is that base rates would be far more trustworthy if patterns were defined by a mechanical algorithm rather than the analyst's eye (Trade2Win / EBC reviews). Hindsight makes patterns "obvious" after the move they supposedly predicted.
• A low success bar. Bulkowski's "success" threshold is often as small as a 5% move, which inflates apparent reliability relative to a tradable edge after costs.
• Decay and outdating. Bulkowski explicitly notes some of his figures are outdated and have not been refreshed; markets dominated by algorithmic and index flows differ from the decades his samples span.
• Survivorship/hindsight lore. The popular reputation of patterns is inflated by remembered winners and survivorship in the examples that get republished.

The defensible conclusion: treat a chart pattern as a structured, falsifiable hypothesis — a clearly defined entry, invalidation, and target — not as a reliable predictor. Its value is in imposing disciplined risk geometry, not in any claimed forecasting power. Whether a given pattern "works" on a given name is a live, regime-dependent question for the decision layer, not a property the pattern guarantees.

Strengths & limitations

Strengths: patterns convert a fuzzy chart into a concrete plan with a defined risk and reward, they're universal across markets and timeframes, and the breakout/invalidation structure enforces a stop. Limitations: subjective identification, performance well below textbook reputation, high failure/throwback rates, and degradation in choppy or news-driven regimes. The single most common misuse is trading the anticipated pattern before the breakout confirms — entering a half-formed shape that then fails to break, or fitting a pattern onto noise because one is wanted.

System relevance

This node is the parent definition for the chart-pattern children listed above (Reversal, Continuation, Cup & Handle, Rounding & Wedges); pattern trade management cross-links to the Swing Trading branch. Any downstream consumer (e.g. the Augustus setup agent) should ingest a detected pattern as a hypothesis with explicit invalidation, weighted by the honest base-rate caveats above and Cairn's measured track record — never as a standalone prediction.

Sources

• Thomas Bulkowski, Best Performing Chart Patterns — thepatternsite.com/BestPatterns.html (high-and-tight flag, cup-and-handle ranking, measurement caveats; notes figures are outdated)
• Thomas Bulkowski, Encyclopedia of Chart Patterns (Wiley) — origin of measured break-even failure rates and average moves
• StockCharts ChartSchool — reversal vs continuation definitions, measured-move and breakout mechanics (chartschool.stockcharts.com)
• Investopedia — continuation/reversal pattern definitions (baseline, cross-checked)
• EBC Financial Group / Trade2Win reviews — critiques of subjective identification, the 5% success threshold, and selection bias in Bulkowski's method