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 & 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 upwards stock trend. As its name implies, this pattern is made up of two consecutive peaks which are roughly equal, with a moderate trough between.
This formation is considered complete once stocks price makes second peak & then penetrates lowest point between the highs, known as the neck line. The sell signal from this formation occurs when the stocks market breaks-out below neck line.
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 last support level formed on the Stocks chart.
Summary:
- Forms after an extended move upward
- This formation indicates that there will be a reversal in the stocks market
- We sell when the price breaks out below 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 downwards stocks trend line as shown below. If a 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 downwards stock trend. It is made up of 2 consecutive troughs which are roughly equal, with a moderate peak between.
This formation is considered complete once stocks price makes second low & then penetrates highest point between the lows, known as the neck line. The buy indication from this bottoming out signal occurs when the stocks market breaks-out the neckline to the upside.
In Stocks, this formation is an early warning trading 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 out above the neck line: see below for the explanation.
The double bottoms pattern look like a W Shape, the best reversal stocks signal is where the second bottoms is higher than the first one as displayed below, this means that the reversal can be confirmed by drawing an upward stocks trend line as shown below. If a trader opens a buy trading signal the stop loss will be placed just below this upward trend line.
W Shaped
