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What is a reversal chart pattern?

A reversal chart pattern signify that the current trend that the price is following is about to change.

Therefore, if price is in an uptrend, a reversal chart pattern will signify that this trend will reverse and the price will now follow a downtrend.

Conversely, if price is in a downtrend, a reversal chart pattern will signify that this trend will reverse and the price will now follow an uptrend.

 

Lets have a look at some common reversal chart patterns, below.

 

 

Double Top

The double top is one of the most common reversal chart patterns.

A double top is a strong signal that an uptrend is about to reverse because the pressure that the buyers are exceeding on the price is slowing down, in which the sellers are able to overcome the buyers and gain momentum.

 

How to spot a Double Top?

  1. Price will be trending upwards.
  2. The price will reach a certain resistance level that it cannot break, known as the top.
  3. The price will bounce off of the top, and move slightly downwards, known as the neckline.
  4. The price will then travel back up, and test the same resistance level again.
  5. If the price cannot break this resistance level, a double top chart pattern is formed. 

Once this double top has been reached, the trend will then normally reverse and enter a downtrend, like below.

 

double top graph

Note: When the price enters this downtrend, it tends to move the same distance downwards as the neckline.

 

 

Double Bottom

The double bottom is similar in nature to the double top, but reverses a downtrend…

A double bottom is a strong signal that a downtrend is about to reverse because the pressure that the sellers are exceeding on the price is slowing down, in which the buyers are able to overcome the sellers and gain momentum.

 

How to spot a Double Bottom?

  1. Price will be trending downwards.
  2. The price will reach a certain support level that it cannot break, known as the bottom.
  3. The price will bounce off of the bottom, and move slightly upwards, known as the neckline.
  4. The price will then travel back down, and test the same support level again.
  5. If the price cannot break this support level, a double bottom chart pattern is formed. 

Once this double bottom has been reached, the trend will then normally reverse and enter an uptrend, like below.

 

double bottom graph

Note: When the price enters this uptrend, it tends to move the same distance upwards as the neckline.

 

 

Head and Shoulders

The head and shoulders pattern is another common reversal chart patterns.

A head and shoulders pattern signals that an uptrend is about to reverse because the pressure that the buyers are exceeding on the price is slowing down, in which the sellers are able to overcome the buyers and gain momentum.

 

How to spot a Head and Shoulders Pattern?

  1. Price will be trending upwards.
  2. The price will reach a certain resistance level that it cannot break, known as the shoulder.
  3. The price will bounce off of the shoulder, and move slightly downwards.
  4. The price will then go back up, and break the resistance level of the shoulder and reach another resistance level slightly higher up, known as the head.
  5. The price will then bounce off of the head, and move slightly downwards, known as the neckline.
  6. The price will then travel back up, and test the same (first) resistance level as the shoulder.
  7. If the price cannot break this resistance level, a head and shoulders chart pattern is formed. 

Once this head and shoulders pattern has been formed, the trend will then normally reverse and enter an downtrend, like below.

 

head and shoulders forex graph

Note: When the price enters this downtrend, it tends to move at least the same distance downwards as that of the distance of the neckline.

 

 

Inverse Head and Shoulders

The inverse head and shoulders pattern is similar in nature to the head and shoulders pattern, but reverses a downtrend…

An inverse head and shoulders pattern signals that a downtrend is about to reverse because the pressure that the sellers are exceeding on the price is slowing down, in which the buyers are able to overcome the sellers and gain momentum.

 

How to spot an Inverse Head and Shoulders Pattern?

  1. Price will be trending downwards.
  2. The price will reach a certain support level that it cannot break, known as the shoulder.
  3. The price will bounce off of the shoulder, and move slightly upwards.
  4. The price will then go back down, and break the support level of the shoulder and reach another support level slightly lower down, known as the head.
  5. The price will then bounce off of the head, and move slightly upwards, known as the neckline.
  6. The price will then travel back down, and test the same (first) support level as the shoulder.
  7. If the price cannot break this support level, a head and shoulders chart pattern is formed. 

Once this head and shoulders pattern has been formed, the trend will then normally reverse and enter an uptrend, like below.

 

 

inverse head and shoulders

Note: When the price enters this uptrend, it tends to move at least the same distance upwards as that of the distance of the neckline.

LESSON SUMMARY:

– A reversal chart pattern signify that the current trend that the price is following is about to change.

– A double top is a strong signal that an uptrend is about to reverse.

– A double bottom is a strong signal that a downtrend is about to reverse.

– A head and shoulders pattern is a strong signal that an uptrend is about to reverse.

– An inverse head and shoulders pattern is a strong signal that a downtrend is about to reverse.

Lesson tags: free forex course
Back to: Free Forex Course > Step 6 - Charting Patterns
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