At first glance, chart patterns seem a relatively simple concept to understand and by all the infographics available, easy to trade and make a profit, but if you think about how easy it is to find a forex chart patterns cheat sheet, it has to make one wonder, if these patterns were so successful why would they be so freely available? Or would those in a position to make a profit from them keep them a closely guarded secret?
The perfectly drawn examples and their easily hit profit targets are exactly that, perfectly drawn examples. Good luck trying to find a textbook example on your charts, not only because the market doesn’t adhere to lines drawn on our charts as well as because chart patterns are subjective, one trader may see a completely different pattern from the next trader.
In our previous article, Bull Flag VS Bear Flag: Secrets To High Probability Trades, we looked into the flag patterns and their effectiveness in helping us find profitable trading setups. In our case study, we found that these patterns were wildly more successful when combined with smart money concepts, both by helping with more accurate entries and target placement as well as keeping us out of what would have been losing trades.
Then, in Supply and Demand in Forex: Secrets To 10X Your Results, we combined a simple candlestick pattern (engulfing candle) with supply and demand concepts, which took a mediocre pattern to what at first glance looked to be the makings of a profitable strategy.
In this article, we will look into some of the more popular forex chart patterns, firstly in their traditional sense, then combined with smart money concepts.
So, in this article, what we will be doing is building our own and also more relevant cheat sheet of how to get the most out of forex chart patterns by viewing them not as stand-alone patterns but as part of a bigger narrative.
Viewing the market from this perspective gives the trader not only the ability to no longer rely blindly on these chart patterns without understanding why these chart patterns form but also to be able to trade them when the probability of a successful outcome is the highest as well as dramatically increasing the risk to reward ratio.
So, let’s take a deep dive into the different types common of chart patterns:
Key Findings
- Chart patterns don’t drive price—liquidity does; read the higher-time-frame narrative first, then use the pattern as confirmation, not the other way around.
- Back-test in the article shows raw pattern trades returned 38.2 R, but layering Smart Money Concepts (structure + liquidity) stretched that to 121.9 R—more than triple the payoff.
- Pattern odds spike when location matches intent: bullish setups at demand or below liquidity pools, bearish setups at supply or above; a mismatch flags a likely failure.
- Integrating SMC lets traders enter before the textbook breakout, keep stops tight, and even exploit failed patterns, boosting reward-to-risk without increasing exposure.
- Bilateral shapes (rectangles, triangles) need extra confirmation; they mark indecision and only gain edge once a clear breakout aligns with the larger liquidity map.
Do Chart Patterns Always Work?
As I mentioned in the opening, if you looked at the textbook examples of every other blog out there, they would have you believe that chart patterns magically predict the future direction of the market. A simple Google search will reveal thousands of results, all with patterns shown hitting targets perfectly, but any trader who has tried trading these chart patterns soon realises that these chart patterns and their perfect trades very seldom exist.
So the short answer is no, chart patterns don’t always work, but this has nothing to do with the chart patterns in question.
Whether it’s “Triple Tops” or “Cup and Handles” and their prediction of future direction or “Crabs” and “Bats” with their measured moves, or any other chart pattern you could think of, no matter how catchy the name, chart patterns are not the cause of any market moves, but more the effect of the market narrative, price moves to liquidity, no matter how many lines or annotations you place on your chart, patterns are a product of price movement and not the other way around.
So, instead of blindly seeing chart patterns, what if we were to look into the narrative behind the chart pattern?
Is there more to this?
Would it be possible to predict the outcome of a chart pattern?
Would it allow a trader to pick the chart patterns with the highest probability of success and avoid those more likely to fail?
Why would a Chart Pattern Fail?
If we apply the same logic to why chart patterns fail, the answer is simple. Just because we see a chart pattern does not mean that we can impose our will on price.
By viewing a pattern in isolation, we lose the big picture and the true narrative of the market. Just because a continuation pattern forms on your time frame does not under any circumstances mean the market must continue in that direction.
If we are able to understand how price moves and reacts when it reaches pools of liquidity, the pattern starts becoming less of a panacea and more of a confirmation of an idea or narrative at play.
How to Avoid Losing Trades?
While avoiding losing trades indefinitely is a near impossible feat, it is possible with an understanding of the market structure and the higher time frame narrative to limit the number of losses and, in this case, to be able to see when a pattern has a higher probability of a successful outcome and in doing so avoiding those with an unfavourable outcome, or with experience the ability to trade the failed pattern.
When to consider Chart Patterns high probability?
A Chart Pattern’s probability is directly correlated to its place in the market structure. If we find a bullish continuation chart pattern at an important resistance key level, a positive outcome of the continuation chart pattern is not likely. However, if in the place of the bullish continuation chart pattern, we find a bearish reversal chart pattern at that same resistance key level, we then have a much higher probability of finding success in trading than the reversal chart pattern.
Why are we not listing all Chart Price Patterns?
We are not listing all chart patterns, firstly because an exhaustive list would be endless as there are too many patterns to cover in one article, but we will list all the chart patterns that we believe are most useful and highest probability to trade.
But the most important aspect of trading is understanding liquidity in the market and market structure.
So once the trader has an understanding of those two, the chart pattern itself becomes less relevant, and instead of trying to make price movements fit into a specific box so it can be given a name and called a chart pattern, we can start to understand that if the price is trying to reach the next pool of liquidity above market price, then you can consider bullish chart patterns that could form that supports the idea of the price moving higher. Alternatively, if the price is trying to reach the next pool of liquidity below market price, then you can consider bearish chart patterns that could form that support the idea of the price moving lower.
So, let’s dive into those chart patterns.
Reversal Chart Patterns
Reversal patterns such as head and shoulder patterns are extremely useful for identifying a potential trend reversal. When traded correctly, these reversal patterns can help traders take advantage of turning points in the market.
Head and Shoulders Chart Pattern
A bearish reversal pattern that occurs at the top of an uptrend and is traditionally traded when there is a break below the neckline, a line drawn across the lows of the head, with stop loss placement above the right shoulder and a target level is reached by measuring from the highest point of the head to the neckline and projecting this distance lower.
Inverted Head and Shoulders Chart Pattern
An Inverted Head and Shoulders Pattern is exactly that, a bullish reversal pattern that occurs at the bottom of a downtrend and is traditionally traded in much the same way when there is a break above the neckline, a line drawn across the highs of the head, with stop loss placement below the right shoulder and a target level is reached by measuring from the lowest point of the head to the neckline and projecting this distance higher.
Double Top Chart Pattern
Traditionally traded in a similar way to the head and shoulders pattern, the entry on a break below the low, stop-loss placed above the high, and, by measuring the distance from the low to the high, then using this same distance for target placement.
Double Bottom Chart Pattern
Traded exactly the opposite way to a double top, the entry on a break above the high, stop loss placed below the low and, by measuring the distance from the high to the low, then using this same distance for target placement.
Rising Wedge in an Uptrend Chart Pattern
Rising wedges are seen a little differently from the previous patterns because a rising wedge in an uptrend will traditionally signal a reversal, whereas a rising wedge in a downtrend will signal continuation.
Playing out as higher highs and higher lows with shorter swings between each, this pattern is traditionally traded when the price breaks below the trend line drawn across the higher lows.
Falling Wedge in a Downtrend Chart Pattern
A falling wedge signals the inverse of a rising wedge, a falling wedge in a downtrend is likely to reverse, and a falling wedge in an uptrend has a higher probability of continuation.
Playing out in a similar fashion this time with lower highs and higher lows with shorter swings between each, traded in isolation as a chart pattern, this could be traded when price breaks above the trendline drawn across the lower highs.
After going through the previous examples, it starts to become apparent that the chart patterns themselves and what we call them are less relevant when we look at them combined with smart money concepts that, in fact, a reversal pattern is less of a pattern and more of creating and running through liquidity, until at the higher time frame point of interest all the orders of smart money have been filled, and price then reverses to reach for the next pool of liquidity or higher time frame reference point, or smart money accumulating or distributing positions in preparation for a price reversal.
Details on this process can be found in Wyckoff Theory: What Every Trader Should Know.
Continuation Chart Patterns
Continuation patterns such as flags and pennants are important for identifying the potential continuation of a trend. These patterns help traders take advantage of ongoing momentum in the forex markets. In the section below, we explore some of the most common continuation patterns, including bullish and bearish flags.
Bullish Flag Chart Pattern
Similar to the wedge pattern and easily mistaken for a falling wedge pattern and generally accepted as a continuation pattern, after a series of lower highs and lower lows in an uptrend, traded when price breaks above the trend line drawn on the lower highs.
Bearish Flag Chart Pattern
Traded inversely to the bullish flag when price breaks below the trend line drawn across the higher lows.
We covered this specific pattern in detail in Bull vs Bear Flag: Secrets To High Probability Trades.
Bullish Pennant Chart Pattern
Similar to flags in their preceding structure and traded in much the same way. Consisting of a series of swings decreasing in magnitude until a breakout occurs.
These patterns, however, are extremely difficult to trade as they can just as easily reverse, and without an understanding of the market’s higher time frame narrative, it is very easy to get caught in a losing trade.
Bearish Pennant Chart Pattern
You will notice in both examples, combined with smart money concepts, that the actual trade entry was either before or after the chart pattern formed. This is because of the unpredictable nature of triangle or pennant chart patterns.
It is possible to trade Triangle Patterns with confidence by using a mechanical strategy like the Symmetrical Triangle Theory, a strategy that combines an understanding of market structure with a mechanical approach and that rewards a high Risk to Reward Ratio.
Rising Wedge in a Downtrend Chart Pattern
Much like flag patterns, Wedges that form against the prevailing trend will most often continue to move in the direction before the consolidation starts.
Viewed in the traditional sense, we would expect this move to continue after there has been a long enough period of consolidation. This is a narrow view of the market narrative at play.
With an understanding of smart money concepts, and in the below example, it is easy to see that the consolidation was not for an amount of time but to a specific area of price, thus allowing the smart money trader to enter a trade before the price has broken out of the pattern.
Falling Wedge in an Uptrend Chart Pattern
When looked at as a chart pattern alone it becomes too easy to get lost in the details of if what we have spotted fits the criteria of a chart pattern, and a trader is too easily drawn into rushing to trade without considering the details, you will notice in the above example, the falling wedge has played out, but there is no need to rush into a position with the risk of being stopped out or forcing a trade with unfavourable risk to reward.
With an understanding of liquidity, a trader is able to wait for price to return to an area of interest and enter a trade with confidence and a favourable risk to reward.
Bilateral Chart Patterns
So far, we have covered the two main categories of forex chart patterns – reversal and continuation. These patterns give traders a clear directional bias to work with in terms of predicting potential trend reversals or continuations. However, there is a third, more elusive category of patterns known as bilateral chart patterns.
Bilateral patterns, such as rectangles and triangles, do not imply any specific directional bias. rather, they represent periods of consolidation and indecision in the market. Support and resistance levels are being tested as buyers and sellers reach more of an equilibrium. The eventual breakout from these patterns will determine the next directional move.
Of the three categories, bilateral patterns tend to be the most unpredictable. They lack the directional clarity of reversal and continuation patterns. As a result, trading bilateral patterns requires additional confirmation, patience, and incorporating other analyses like overall market conditions.
While they present great trading opportunities, extra caution should be exercised with bilateral patterns due to their uncertain nature compared to other types of chart patterns.
Are Chart Patterns Worth it?
While always successful in the textbook diagrams, trading a pattern in isolation is not likely to offer the trader much success.
In this article, we only looked at winning trades as the study was more to understand if there is any benefit to trading chart patterns combined with Smart Money Concepts.
For a more in-depth understanding of why patterns fail and how an understanding and the ability to find the “footprints” of the banks can help you stay out of bad trades, the Bank Level Trading Strategy covers this in detail.
What we are able to see clearly from this article is that trading with an understanding of market structure puts you at a distinct advantage over someone’s trading patterns in isolation.
Each trade was marked with the risk to reward that was possible. So, if we were to add up all the returns on the trades taken as chart patterns in isolation, we would get a total of 38.2 times our risk. This is assuming no losses. Of which there will be many, a study of your own charts will reveal this fairly quickly.
However, if we take that idea of chart patterns and combine it with Smart Money Concepts, it not only would give a clearer indication of the likelihood of success of a trade, but the returns grow to 121.9 times our risk. A fairly substantial change in profits and is not taking into account the increased win rate that would come with this combined view of the market.
So, to answer the question, are chart patterns worth it? There is some merit in helping us as traders identify possible trade setups, as long as the pattern is seen as an indication of a possible trade setup and not a trade setup in its entirety.
