7 reversal patterns that every trader must know
A thread
A thread
2/ Reversal patterns tend to form at the turning points of the market i.e., during trend change
3/ The risk in playing reversal patterns is comparatively higher since you are trading against the trend
But reward also tend to be higher
Risk management is key with such patterns
But reward also tend to be higher
Risk management is key with such patterns
4/ In this thread, I'll cover 7 key reversal patterns:
- Double top
- Double bottom
- Triple top/bottom
- Head and shoulders
- Inverse head and shoulders
- Rising wedge
- Falling wedge
- Double top
- Double bottom
- Triple top/bottom
- Head and shoulders
- Inverse head and shoulders
- Rising wedge
- Falling wedge
5/ We’ll first look at the key characteristics of each pattern
Followed by the strategy to profit from them
Keep a close eye on the charts for all the visual learners
Followed by the strategy to profit from them
Keep a close eye on the charts for all the visual learners
6/ Double Top Pattern
- Short setup
- Signals an incoming bearish reversal
- Two tops of near-equal highs are formed
- Short setup
- Signals an incoming bearish reversal
- Two tops of near-equal highs are formed
7/ Target/Stop-loss
- Breakout point = confirmed candle close below the neckline
- Target = same length as the distance from top to neckline measured from breakdown point
- Stop loss placed above the neckline based on risk tolerance
- Breakout point = confirmed candle close below the neckline
- Target = same length as the distance from top to neckline measured from breakdown point
- Stop loss placed above the neckline based on risk tolerance
8/ Double Bottom Pattern
- Long setup
- Signals an incoming bullish reversal
- Two tops of near-equal bottoms are formed
- Long setup
- Signals an incoming bullish reversal
- Two tops of near-equal bottoms are formed
9/ Target/Stop-loss
- Breakout point = confirmed candle close above the neckline
- Target = same length as the distance from top to neckline measured from breakout point
- Stop loss placed below the neckline based on risk tolerance
- Breakout point = confirmed candle close above the neckline
- Target = same length as the distance from top to neckline measured from breakout point
- Stop loss placed below the neckline based on risk tolerance
10/ Triple top or bottom follows the same principles as double top or bottom
The only difference is there are 3 tops/bottoms instead of 2
Here's an example of a triple-bottom pattern
The only difference is there are 3 tops/bottoms instead of 2
Here's an example of a triple-bottom pattern
11/ Head and Shoulders Pattern
- Short setup
- Signals an incoming bearish reversal
- 3 successive peaks formed: middle peak (head) being the highest and 2 outside peaks (shoulders)
- Short setup
- Signals an incoming bearish reversal
- 3 successive peaks formed: middle peak (head) being the highest and 2 outside peaks (shoulders)
12/ Target/Stop-loss
- Breakout point = confirmed candle close below the neckline
- Target = same length as the distance from head to neckline measured from breakdown point
- Stop loss placed above the neckline based on risk tolerance
- Breakout point = confirmed candle close below the neckline
- Target = same length as the distance from head to neckline measured from breakdown point
- Stop loss placed above the neckline based on risk tolerance
13/ Inverse Head and Shoulders Pattern
- Long setup
- Signals an incoming bullish reversal
- 3 successive peaks formed: middle peak (head) being the highest and 2 outside peaks (shoulders)
- Long setup
- Signals an incoming bullish reversal
- 3 successive peaks formed: middle peak (head) being the highest and 2 outside peaks (shoulders)
14/ Target/Stop-loss
- Breakout point = confirmed candle close above the neckline
- Target = same length as the distance from head to neckline measured from breakout point
- Stop loss placed below the neckline based on risk tolerance
- Breakout point = confirmed candle close above the neckline
- Target = same length as the distance from head to neckline measured from breakout point
- Stop loss placed below the neckline based on risk tolerance
15/ Rising Wedge Pattern
- Short setup
- Signals an incoming bearish reversal
- Price high and low start to converge while rising, forming the support and resistance of the wedge
- Short setup
- Signals an incoming bearish reversal
- Price high and low start to converge while rising, forming the support and resistance of the wedge
16/ Target/Stop-loss
- Breakout point = confirmed candle close below the support line of the wedge
- Target = same length as the widest length from top to bottom of wedge measured from breakdown point
- Stop loss placed above the support line based on risk tolerance
- Breakout point = confirmed candle close below the support line of the wedge
- Target = same length as the widest length from top to bottom of wedge measured from breakdown point
- Stop loss placed above the support line based on risk tolerance
17/ Falling Wedge Pattern
- Long setup
- Signals an incoming bullish reversal
- Price high and low start to converge while falling, forming the support and resistance of the wedge
- Long setup
- Signals an incoming bullish reversal
- Price high and low start to converge while falling, forming the support and resistance of the wedge
18/ Target/Stop-loss
- Breakout point = confirmed candle close above the resistance line of the wedge
- Target = same length as the widest length from top to bottom of wedge measured from breakout point
- Stop loss placed below the resistance line based on risk tolerance
- Breakout point = confirmed candle close above the resistance line of the wedge
- Target = same length as the widest length from top to bottom of wedge measured from breakout point
- Stop loss placed below the resistance line based on risk tolerance
19/ The more a trader uses these patterns, the better the eye gets trained to spot them
Time to get some practice
Time to get some practice
20/ Be sure to check out the thread on Continuation Patterns to complement the Reversal Patterns
21/ Thanks for reading!
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And follow @gameoftrades_ for more market insights, finance, and investment strategy content.
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