Different Types of Reversal Patterns Reversal patterns mean the formation of candlesticks which indicate the end of the existing trend (uptrend or downtrend). When such formation appears in a downtrend, it indicates a bullish reversal or end of selling spree and onset of buying spell. Conversely, when a trend reversal pattern forms in an uptrend, it warns traders of a possible end to bullish run and onset of a slump.
Head & Shoulder Pattern It’s a chart formation created by three peaks of the price. The two peaks on the sides are usually of the same height or close, and the one in the middle is the highest. The Head & Shoulders pattern is considered one of the most powerful reversal patterns. This pattern got the name because it actually reminds us of a head with two shoulders on the sides. Usually, we will look for this pattern and use it after a significant uptrend or an opposite Head & Shoulders after a downtrend.
Inverse Head & Shoulder Pattern Inverse head and should is exactly the opposite of the head and shoulder pattern. It’s a chart formation created by three troughs of the price.
The two peaks on the sides are usually of the same height or close, and the one in the middle is the lowest. Formation of an inverse head and shoulders pattern appearing in a downtrend is an indication of bearish to bullish reversal. Traders enter a long position when the price breaks through the resistance line or the neck line. They would look for a rise in volume to confirm the trend change.
Double Top The double-top pattern will usually occur and be useful after a significant uptrend. In an uptrend, the price always creates higher peaks and higher lows. The price takes support with previous swing low twice and try to go higher. Failure to make new highs, market reverses to the support and breaks down. The target will be places at the difference between the support line and the swing high. Stoploss should be 50% of the last swing. The double-top pattern is created by two peaks that are at the same level. This occurs after an uptrend and it means that the buyers are no longer powerful. The trigger line is the bottom that is between the two peaks.
Double Bottom The double bottom is the exact opposite of double top. When the price of a stock are in a downtrend, the price creates lower highs and lower bottoms. The price creates two bottoms at the same level in the double bottom pattern, and the sellers failed to create a new lower bottom. That indicates the sellers are running out of power, and a reversal opportunity might appear very soon.
Triple Top Triple top is a bearish signal that forms after an uptrend. Characteristics of triple top: • This pattern is formed with three peaks above a support level/neckline. • The first peak is formed after a strong uptrend and then retrace back to the neckline. • The formation of this pattern is completed when the prices move back to the neckline after forming the third peak. • When the prices break through the neckline or the support level after forming three peaks then the bearish trend reversal is confirmed.
Triple Bottom Triple bottom is a bullish signal that forms after a downtrend. Characteristics of a triple bottom: • The pattern is formed with three troughs below the resistance zone/ neckline. • The first peak is formed after a strong downtrend and then retrace backs to the neckline. • The formation of this pattern is completed when the price moves back to the neckline after the formation of third trough. • Once the prices break through the neckline or the support level after forming three peaks then then bullish trend reversal is confirmed. If you want to learn how to trade each of these patterns, head over to the Ultimate guide to reversal pattern blog and learn to trade these patterns in actual markets.