Reversal chart patterns are technical formations that indicate the potential for a change in the current market direction. If they appear in an upward trend, they may signal a bearish reversal, and if formed during a downward trend, they may indicate an upcoming rise.
The most famous reversal patterns:
🔹 Double Top
This pattern occurs when the price reaches a resistance level twice and then begins to decline, indicating a bearish reversal.
🔹 Double Bottom
Appears when the price bounces twice from a strong support level, indicating a potential bullish reversal.
🔹 Head and Shoulders
Consists of three peaks, with the middle peak (the head) being higher than the two side peaks (the shoulders). Breaking the neckline confirms a bearish reversal.
🔹 Inverse Head and Shoulders
Similar to the previous pattern but inverted, formed in a downward trend and indicates a bullish reversal upon breaking the neckline.
🔹 Rising Wedge
The price moves within a narrow upward range before breaking down, indicating an impending decline.
🔹 Falling Wedge
Appears when the price moves in a narrow downward channel before breaking upward, indicating a potential rise.
How to trade based on these patterns:
✔ Entry: Place an order upon breaking the neckline in the direction of the new movement.
✔ Targets: Set your price target at a distance approximately equal to the height of the pattern.
✔ Stop loss: It is preferable to place it at the midpoint of the formation to reduce risks.
📌 Practical example:
If the double bottom appears, place a buy order above the neckline and set your target at a distance equal to the distance between the bottom and the neckline. Place the stop loss at the midpoint between the two bottoms and the neckline.
🔹 Risk management is the key to success when using these patterns in trading!