Head and shoulders: This formation develops when a left top is followed by a higher center top and a lower right top with similar bottoms.

The V bottom or top is a common pattern is difficult to trade because no prior support or resistance level is established before the top or bottom. Where would you go long or short the market in this pattern, or where should a protective stop be placed? There is only one reference point of support in a bottom and resistance in a top; so it is hard to determine good entry or exit points.

A double top and bottom are the line drawn off the two highs of a double top provides a strong resistance level. The low between the two tops is an important support level, so a break below this level may indicate lower prices. A protective buy stop may be placed at the resistance line. The reverse holds true for a double bottom. The line drawn off the two lows on a double bottom indicates a good support level. The high between the two lows is an important resistance level, so a break above this area may indicate higher prices. A protective sell stop may be placed at the support line.

There are many other types of patterns, but they are often variations on the previously mentioned ones. Some technicians believe certain patterns have predictive value, while others trade most patterns as consolidation phases, where the market is waiting to break out on one side or the other.

When trading, it is often much easier to look for simple consolidation patterns than to search for exact formations which are more often an idea than a reality. Even when the exact pattern is found, there is still no guarantee the market will trade in the way It is "supposed to." You are far better off trying to understand the dynamics behind a pattern than memorizing the exact rules of a formation and being able to see one clearly in hindsight.

The previous examples showed some common formations and resulting profitable trades. Many traders become frustrated in using chart patterns because the signals do not always yield profitable trades. No chart formations will always provide winning trades, but the trader should not be searching for patterns which work 100% of the time. A more realistic goal of the trader is to find patterns that have a reasonable chance of yielding profitable trades.

Many technicians have somewhat precise and specific rules about trading each pattern. However, the patterns are inherently subjective, so it is better to know the fundamental ideas of why a pattern might work. Then the trader can observe the standard patterns, and create new ones which will help in developing more insight into trading them.