reversal technical patterns overview part one

23 mar 2023

Reversal Technical Patterns overview: Part One

Reversal patterns are frequently spotted at the end of the bear/bull market cycles. Here are some of the key patterns with higher probabilities. Can be applied to any market, including forex, crypto, stocks, indices and metals.

Double Bottom (Bulls)
Double Top (Bears)

🔸A double bottom pattern is a classic technical analysis charting formation showing a major change in trend from a prior down move. The double bottom pattern looks like the letter W.

🔸The double top is a type of chart pattern that is an indication that the prevailing trend may reverse, in the short or long term.

🔸The double top is a common occurrence towards the end of a bullish market. The price formation looks like two peaks that occur after one another.

🔸The double bottom formation typically occurs at the end of a downward trending or declining market.

🔸 The double bottom is similar to the double top, but the key difference between the two can be seen in the inverse or negative relationship in price.

Inverse Head and Shoulders (Bulls)
Head and Shoulders (Bears)

🔸The inverse head and shoulders pattern begins with a downtrend. This is the extended move down that eventually leads to exhaustion and a reversal higher as sellers exit and buyers step up. That downtrend is met by minor support, which forms the first shoulder. As the market begins to move higher, it bounces off strong resistance and the downtrend resumes. This resistance level forms the neckline.

🔸Pattern is defined by the head / left shoulder / right shoulder and neckline.

🔸The H*S pattern is a bearish market pattern will appear near market tops. The first shoulder forms after a significant bullish period in the market when the price rises and then declines into a trough. The head is then formed when the price increases again, creating a high peak above the level of the first shoulder formation. From this point, the price falls and creates the second shoulder, which is usually similar in appearance to the first shoulder.

🔸The pattern is completed, giving a market reversal signal, when the price declines again, breaking below the neckline. The neckline, as depicted above, is the horizontal line that connects the first two troughs to one another.

Three Drives (Bulls)
Three Drives (Bears)

🔸The three-drive is a rare price pattern formed by three consecutive symmetrical drives up or down. In its bullish form, the market is making three final drives to a bottom before an uptrend forms. In a bearish three-drive, it is peaking before the bears take over. A three-drive contains two overlapping ABCD patterns.

🔸There are multiple ways of trading a Three drives pattern:
You can trade the drive 3. Enter the market when you are sure that the market has formed the point B (buy in a bearish Three-Drive and sell in a bullish Three Drive).
You can trade when the entire pattern is complete.

🔸Extensions are always based on fibs, most of the time 1.27 and 1.62.

Falling Wedge (Bulls)
Rising Wedge (Bears)

🔸The falling wedge pattern is interpreted as both a bullish continuation and bullish reversal pattern which gives rise to some confusion in the identification of the pattern. Both scenarios contain different market conditions which must be taken into consideration.

🔸The Falling Wedge in the downtrend indicates a reversal to an uptrend. It is formed when the prices are making Lower Highs and Lower Lows compared to the previous price movements. It gives traders opportunities to take buy positions in the market.

🔸The rising wedge in an uptrend indicates reversal to the downtrend. It is formed when the prices are making Higher Highs and Higher Lows compared to the previous price movements. It gives traders opportunities to take short positions in the market

🔸Generally, traders will wait for a breakout before executing a trade on buy/sell side. Also traders may chose to wait for a re-test of the breakout area before executing a trade.