Charts Patterns: Reversal Patterns

Beginner

In this Master Academy educational video and article, we are looking at Charts Patterns, focusing on Reversal Patterns.

Charts Patterns

  • A chart pattern is a distinct formation on a chart that signals potential for future price movements
  • Technical Analysts use these patterns to identify current trends, trend reversals and for buy and sell signals
  • There are two types of patterns, Reversal and Continuation
  • In this article and accompanying video we will be looking at Reversal patterns

Reversal Patterns

Examples of major Reversal patterns are:

  • Double Tops
  • Double Bottoms
  • Triple Tops
  • Triple Bottoms
  • Head & Shoulders
  • Inverse Head & Shoulders

Double/Triple Tops & Bottoms

  • These patterns are formed after a sustained trend
  • They signal that the trend is about to reverse
  • These patterns are created when price tests resistance or support (twice for Double and three times for Triple) but cannot break through
  • A bottom is completed when price moves above the interim peak for a Double/Triple Bottom
  • A top is completed when price moves below the interim low for a Double/Triple Top
  • A price target is calculated by measuring between the peaks/troughs and the interim level, projected from the breakout
  • This price target is called the Minimum Price Objective or MPO

Double Bottoms

Double Bottom

Double Bottom Example

Double Tops

Double Tops

Double Top Example

Head & Shoulders Top pattern

  • A Head & Shoulders Top is a bearish reversal pattern
  • It requires a prevailing up trend
  • The Head & Shoulders Top contains three successive peaks
  • The middle peak (Head) is the highest and the two outside peaks (Shoulders) being lower and roughly equal
  • The reaction or swing lows of each peak are connected to form a “Neckline”
  • The “Neckline” can slope up, slope down or be horizontal
  • If the “Neckline” is broken, The Head & Shoulder Top is complete, and the up trend is reversed
  • The Minimum Price Objective (MPO) for the Head & Shoulder Top is the height of the Head from the Neckline, projected down from the break of the Neckline

H&STop

H&STopexample

Inverse Head & Shoulders Bottom patterns

  • A Head & Shoulders Bottom is a bullish reversal pattern
  • It requires a prevailing down trend
  • The Head & Shoulders Bottom contains three successive troughs
  • The middle peak (Head) is the lowest and the two outside peaks (Shoulders) being higher and roughly equal
  • The reaction or swing highs of each peak are connected to form a “Neckline”
  • The “Neckline” can slope up, slope down or be horizontal
  • If the “Neckline” is broken, The Head & Shoulder Bottom is complete, and the down trend is reversed
  • The Minimum Price Objective (MPO) for the Head & Shoulder Bottom is the height of the Head from the Neckline, projected up from the break of the Neckline

Inverse Head & Shoulders Bottom patterns

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