What are reversal patterns?
Reversals are identifiable patterns that develop in the movement of the price. Reversal patterns signal a significant change in market direction has occurred. There can also be implied price targets that can be derived from the pattern.
The important feature of a reversal is that the price breaks an important and established trend before starting to form a new counter trend. This comes as key price levels in the previous trend have been breached. Check out this video on reversal patterns for more info
- A bullish reversal is a pattern that comes at the end of a downtrend. It involves the price breaking above the resistance of an important lower high. This completes the pattern and begins to form a new positive trend.
- A bearish reversal is a pattern seen at the end of an uptrend where the price breaks below the support of an important higher low. The completed reversal then begins to form a new negative trend.
Waiting for confirmation
It is important to wait for a reversal pattern to be completed before taking any trading signals. However, the better conviction will come from there being confirmation of the completed pattern.
For example, the price falling below important support can complete a bearish reversal, but often traders will look for a closing break (or even a two-day closing break) for confirmation. Additional confirmation could be the subsequent breaching of further important support.
Pullbacks and Consolidations
Another feature often seen in reversal patterns is that after the price has completed the reversal there will be either a pullback rally (in a bearish reversal) or a consolidation (in a bullish reversal). These result in the price returning to the neckline of the pattern. This can give another opportunity for traders to play the reversal pattern, but can also act as further confirmation too.
Types of reversal patterns
There are bullish reversals and bearish reversals. Here are some of the more popular ones.
Bullish reversal patterns: .
- Double bottom
- Triple bottom
- Rounding bottom
- Inverted head and shoulders (Head and shoulders Bottom)
Bearish reversal patterns:
- Double top
- Triple top
- Rounding top
- Head and shoulders top
