Patterns are the basic foundation of technical analysis. As prices trace their way across the chart, they create patterns that often resolve themselves in a predictable way. The primary tenet of technical analysis is the repetition of human behavior, which can be tracked as well-categorized geometric patterns on the charts. Therefore, recognizing the patterns early results in an opportunity to capitalize on their implications.
Depending on their layout, patterns signal either a price reversal or price continuation. Nonetheless, it’s important to note that, sometimes, patterns do not follow their expected path. Occasionally, prices will create fake-out moves that invalidate the original pattern. For this reason, it’s important to remember that patterns are merely a guide, not a sure-proof method for trading. Nevertheless, the classic patterns discussed in this chapter have been used by traders for many generations to successfully trade a variety of markets. Therefore, we consider them to be an essential component of any trader’s education.