Module 6A: Chart Patterns · Lesson 2 of 4 · Back to course
Reversal patterns are shapes that traders read as a sign a trend may be running out of steam. This lesson covers the three best known – the double top, the double bottom and the head and shoulders – how each is defined, how traders project a “measured move”, and the honest reasons they fail.
Double top
What it looks like: in an uptrend, price rallies to a high, pulls back, rallies again to roughly the same high, and fails. The low of the pullback between the two highs is the trigger level (sometimes called the neckline).
What it suggests: buyers twice failed to push through the same area. The pattern is only complete when price closes below the trigger level. Until then, it’s just two highs.
Measured move: the height from the highs to the trigger level, projected down from the break. It’s a rough guide to how far the move might travel, not a target.
Double bottom
The mirror image: two similar lows in a downtrend with a peak between them. It completes when price closes above the peak.
Head and shoulders
What it looks like: three peaks. The middle one (the head) is the highest; the two either side (the shoulders) are lower and roughly similar. A line joining the two dips between the peaks is the neckline.
What it suggests: the uptrend made a higher high (the head), then failed to make another one (the right shoulder). That’s a change in market structure.
Trigger: a close below the neckline. Measured move: the height from the head to the neckline, projected down from the break.
Inverse head and shoulders is the same shape upside down at the bottom of a downtrend, triggered by a close above the neckline.
Why they fail
- Most “tops” never complete. Price often makes two similar highs and then simply breaks higher.
- False breaks. Price closes below the neckline, then snaps back above it, hitting stops on both sides.
- The trend is stronger than the pattern. In a strong uptrend, reversal patterns on small timeframes are mostly noise.
- Measured moves are often not reached. Treat them as one possible target among several, not a forecast.
Where traders put stops
A common approach is a stop above the right shoulder (head and shoulders) or above the highs (double top). That’s where the pattern would be clearly wrong. The distance is often large, so the position must be smaller to keep risk the same. Some traders wait for a retest of the broken neckline to get a closer stop, accepting that many moves never retest.
Example (illustrative numbers)
All figures are made up for teaching purposes. They aren’t real prices or a trade idea.
An index makes a left shoulder at 8,050, a head at 8,120 and a right shoulder at 8,060. The neckline sits at 7,980.
- Pattern height: 8,120 − 7,980 = 140 points
- Measured move from the break: 7,980 − 140 = 7,840
- A stop above the right shoulder, say 8,070, is 90 points from a 7,980 entry.
With a £10,000 demo account risking 1% (£100), the stake would be £100 ÷ 90 ≈ £1.11 per point. In this example, the measured move is 140 points away, about 1.6 times the risk – but there’s no guarantee price gets there, and it may hit the stop first.
The prop firm angle
Reversal patterns invite counter-trend trades, and repeated counter-trend losses are a common way to hit a daily loss limit. If you trade them in a challenge, require a confirmed close through the neckline, keep risk per trade fixed, and never widen the stop because “the head is the real level”.
Key takeaways
- Double tops/bottoms and head and shoulders show a trend failing to make new highs (or lows).
- They’re only complete when price closes through the trigger level.
- Measured moves are rough guides, not targets.
- Stops go where the pattern is clearly wrong; size the trade from that distance.
Quick quiz
- What completes a double top? (A close below the low between the two highs.)
- Which peak is highest in a head and shoulders? (The middle one, the head.)
- Head at 1.2700, neckline at 1.2600. What is the measured move from the break? (100 pips, projecting to 1.2500.)
- Why might a trader wait for a retest? (To get a closer stop, accepting some moves won’t retest.)
- Is the measured move a guaranteed target? (No. It’s a rough guide and is often not reached.)
Key terms
Double top · Double bottom · Head and shoulders · Neckline · Measured move · Retest · Market structure
Try this
On a daily chart, find two examples each of a double top, a double bottom and a head and shoulders that completed, and two of each that didn’t. Note where the stop would have gone and whether the measured move was reached.
FAQ
Is head and shoulders the most reliable pattern? It’s often described that way, but reliability claims depend on how it’s defined and tested. Test your own definition.
What about triple tops? Same idea, three highs instead of two. The rules for completion and stops are the same.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.