Reversal Trading Patterns

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

When stocks 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 learn stocks 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 stocks pattern that forms after an extended upward stock trend. As its name implies, this formation is made up of two consecutive peaks that are roughly equal, with a moderate trough between.

This formation is considered complete once stocks 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 stocks market breaks below the neckline.

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

Summary:

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

The double tops look like an M Shape, the best reversal stocks 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 stocks trend line as shown below. If a stocks trader opens a sell signal the stop loss will be placed just above this downward trend line.

M Shaped

Double Bottom

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

This formation is considered complete once stocks 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 stocks market breaks the neckline to the upside.

In Stocks, this formation is an early warning signal that the bearish stocks 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 stocks price. Once this resistance is broken the stocks market will move up.

Summary:

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

The double bottoms pattern look like a W Shape, the best reversal stocks 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 stocks trend line as shown below. If a stocks trader opens a buy signal the stop loss will be placed just below this upward trend line.

W Shaped