- Reversal Patterns
- Head & Shoulders
- Double Tops & Bottoms
- Bull & Bear Traps
- Triple Tops & Bottoms
Reversal Patterns
- A prerequisite for any reversal pattern is the existence of a prior trend
- Reversal patterns indicate that an important reversal in trend is taking place
- Trading volume plays an important role in confirming these price patterns
The most common trend reversal patterns are
- Head and Shoulders
- Double Tops & Bottoms
- Triple Tops & Bottoms
Head and Shoulders Top
- Rally to a new high with lower volume
- Break below the uptrend line
- Rally with lower volume, fails to go above the previous top
- Break of neckline with increased volume
- Failure to go above the neckline
Head and Shoulders Bottom
- Move to a new low with lower volume
- Break above the downtrend line
- Drop with lower volume, fails to go below the previous bottom
- Break of neckline with increased volume
- Failure to go below the neckline
Double Top
- Two tops at the same level
- A break below the last bottom, confirms a double top formation
- Increased volume at the breakout level acts as confirmation for the reversal
Double Bottom
- Two bottoms at the same level
- A break above the last top, confirms a double bottom formation
- Increased volume at the breakout level acts as confirmation for the reversal
Bull Trap
- Prices break above the last top generating a bullish signal
- Reverses and “traps” buyers who acted on the signal
- A break below the last bottom confirms a bull trap formation
Bear Trap
- Prices break below the last bottom generating a bearish signal
- Reverses and “traps” sellers who acted on the signal
- A break above the last top confirms a bear trap formation
Triple Top
- Three tops at about the same level
- A break below the last bottom, confirms the triple top formation
- Increased volume at the breakout level acts as confirmation for the reversal
Triple Bottom
- Three bottoms at around the same level
- A break above the last top, confirms the triple bottom formation
- Increased volume at the breakout level acts as confirmation for the reversal
Diamond Reversal Pattern
- A broadening top followed by a symmetrical triangle
- After the break of the neckline prices drop out of the pattern and reverse
- The decline after the formation is completed is expected to retrace all the previous gains
- A quick rise can serve as an identification clue to a diamond formation
- The diamond formation is only confirmed after a break below the trendline
Rounding Top Pattern
- A long term pattern that develops at a market peak
- Around the peak, investors loose interest and upward momentum dissipates
- Volume almost dries up at the time the price is reaching the high
- Towards the end of the pattern, both momentum and volume increase exponentially
- The pattern is constructed by drawing a circular line above the highs
Saucer Pattern
The price action of the saucer is exactly opposite to that of the rounded top pattern
Around the bottom, investors loose interest and downward momentum dissipates
Volume almost dries up at the time the price is reaching the low
Towards the end of the pattern, both momentum and volume increase exponentially
The pattern is constructed by drawing a saucer-shaped letter U line below the lows
