Retail patterns

Why learn them

Retail patterns are the ones everyone is taught. Most traders use them or have at least heard of them. To understand how institutions trade you need to understand why these patterns work and why they fail. A large part of them are invalid when they appear, and they are a way for institutions to collect liquidity: the entries and stops that cluster around a shape everyone can see. These shapes are handed to the masses as a strategy for entering the market, and many of them are traps.

Reversal patterns

A reversal pattern is a formation that suggests the current trend might be about to change direction. If price has been rising and a reversal pattern appears, it hints that price could start to fall; if price has been falling, it hints at a rise.

Double tops and bottoms

A double bottom is two consecutive lows at about the same price, followed by a rally through the high between them, the neckline. It signals a possible turn from a downtrend to an uptrend. A double top is the mirror: two consecutive highs, then a break below the neckline, signalling a possible turn from an uptrend to a downtrend.

Head and shoulders

A head and shoulders pattern is three peaks with the middle one, the head, higher than the two shoulders either side. The shoulders failing to reach the head shows bullish momentum fading, and the break of the neckline under the three peaks is the signal that the trend may turn down. An inverse head and shoulders is the same shape upside down at the end of a downtrend: three troughs, the middle one the lowest, and a break above the neckline.

Wedges

A rising wedge is two converging trend lines that both slope up. Price is still making higher highs and higher lows, but each push gains less, and the pattern usually resolves with a break down. A falling wedge is two converging trend lines that both slope down: lower highs and lower lows with fading momentum, and usually a break up.

Continuation patterns

A continuation pattern is a pause inside a trend that suggests the trend will resume once the pause is over. In an uptrend it hints that price will keep rising after a short break; in a downtrend, that it will keep falling.

Flags

A bear flag forms inside a downtrend: a sharp fall, the flagpole, followed by a shallow upward drift, the flag. When the drift breaks down, sellers have regained control. A bull flag is the opposite: a sharp rise, a shallow downward drift, and a break up as buyers resume.

Rectangles

A bullish rectangle is a sideways range inside an uptrend, bounded by a horizontal support and a horizontal resistance. Buyers and sellers are balanced for a while before the trend continues upward. A bearish rectangle is the same range inside a downtrend, resolving downward.

Pennants

A bullish pennant is a brief consolidation inside an uptrend whose trend lines converge into a small symmetrical triangle, followed by a break up. A bearish pennant is the same small triangle inside a downtrend, followed by a break down.

Triangles

A symmetrical triangle connects a series of lower highs and higher lows; it marks indecision, and the break can come in either direction. An ascending triangle has a flat resistance and a rising support, and leans bullish. A descending triangle has a flat support and a falling resistance, and leans bearish.

Where the stops sit

Every one of these patterns comes with a textbook entry and a textbook stop: buy the neckline break, stop under the second low; sell the flag break, stop above the flag. When thousands of traders see the same shape, their stops sit in the same place, and a market that needs liquidity knows where to find it. The supply and demand lesson shows what the other side does with those stops.

Replay the break

The Trade Desk replays any breakout candle by candle. Click the candle that broke the neckline and watch what the market did next with the entries and stops that gathered there, and where your own trade sat.