Types of Reversal Chart Patterns
There are two basic types of trend reversal patterns; the bearish reversal pattern and the bullish reversal pattern.
The Bullish reversal pattern forecasts that the current bearish move will be reversed into a bullish direction.
The Bearish reversal pattern forecasts that the current bullish move will be reversed into a bearish direction.
Double Top and Double Bottom
We will start with the Double Top reversal chart pattern. The pattern consists of two tops on the price chart. These tops are either located on the same resistance level , or the second top is a bit lower. The double top pattern typically looks like the letter “M”.
The Double Top has its opposite, called the Double Bottom . This pattern consists of two bottoms, which are either located on the same support level , or the second bottom is a bit higher. The double bottom pattern typically looks like the letter “W”.
Head and Shoulders
The Head and Shoulders pattern is a very interesting and unique reversal figure. The shape of the pattern is aptly named because it actually resembles a head with two shoulders.
The pattern forms during a bullish trend and creates a top – the first shoulder. After a correction, the price action creates a higher top – the head. After another correction, the price creates a third top, which is lower than the head – the second shoulder. So we have two shoulders and a head in the middle.
Of course, the Head and Shoulders reversal pattern has its inverted equivalent, which turns bearish trends into bullish . This pattern is referred to as an Inverted Head and Shoulders pattern.
Reversal patterns are a key part in trading and especially useful for confirmations in your trade ideas. You may not always find reversal patterns but when you do you will know the best possible entries!