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Reversal Chart Patterns

These patterns are formed after the market has had an extended move up or down and the price reaches a strong resistance or support respectively.

 

When price reaches such a point it starts to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how and start using them. There are four types:

 

  • Double Tops
  • Double Bottoms
  • Head and shoulders
  • Reverse Head and shoulders

 

This tutorial will only cover double tops and bottoms, for the other 2, read this other tutorial: head & shoulders and reverse head & shoulders

 

 

Double Tops

This is a reversal pattern that forms after an extended uptrend. As its name implies, this formation is made up of two consecutive peaks that are roughly equal, with a moderate trough in between.

 

This formation is considered complete once price makes the second peak and then penetrates the lowest point between the highs, called the neckline. The sell signal from this formation occurs when the market breaks below the neckline.

 

In Forex, this formation is used as a early warning signal that a bullish Forex trend is about to reverse. However, it is only confirmed once the neckline is broken and the market moves below the neckline. Neckline is just another name for the last support level formed on the Forex chart.

 

Summary:

  • Forms after an extended move upwards
  • This formation indicates that there will be a reversal in the market
  • We sell when price breaks below the neckline; see below for explanation.

Double Tops candlesticks chart pattern

 

 

The double tops look like an M-Shape, the best reversal signal is where the second top is lower than the first one as shown below, this means that the reversal can be confirmed by drawing a downward trend line as shown below. If a trader opens a sell signal the stop loss will be placed just above this downward trend line.

Double Tops On Forex Chart Drawing an Downward Trendline

M-Shaped

 

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Double Bottoms

This is a reversal  pattern that forms after an extended downtrend. It is made up of two consecutive troughs that are roughly equal, with a moderate peak in between.

 

This formation is considered complete once price makes the second low and then penetrates the highest point between the lows, called the neckline. The buy indication from this bottoming out signal occurs when the market breaks the neckline to the upside.

 

In Forex, this formation is an early warning signal that the bearish Forex trend is about to reverse. It is only considered complete/confirmed once the neckline is broken. In this formation the neckline is the resistance level for the price. Once this resistance is broken the market will move up.

 

Summary:

  • Forms after an extended move downwards
  • This formation indicates that there will be a reversal in the market
  • We buy when price breaks above the neckline; see below for explanation.

Reversal Chart Patterns: Double Tops and Double Bottoms


 

The double bottoms pattern look like a W-Shape, the best reversal signal is where the second bottom is higher than the first one as shown below, this means that the reversal can be confirmed by drawing an upward trend line as shown below. If a trader opens a buy signal the stop loss will be placed just below this upward trend line.

Double Bottoms On Forex Chart Drawing an Upward Trendline

W-Shaped

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