Home Business & Management HOW TO IDENTIFY REVERSAL CHART PATTERN

HOW TO IDENTIFY REVERSAL CHART PATTERN

When a reversal chart pattern arrives in a particular chart of any time frame of a particular security, the ongoing trend tend tends to reverse. Reversal patterns can be either bullish or bearish.

TOPICS TO COVER

  1. Bearish reversal pattern
  2. Double Top
  3. Triple Top
  4. Bullish reversal pattern
  5. Double Bottom
  6. Triple Bottom

BEARISH REVERSAL CHART PATTERN

1. DOUBLE TOP

double top reversal chart pattern

DEFINITION

The double top is a bearish reversal pattern. As the name suggests the double top is made up of two consecutive peaks that are roughly the same height.

This pattern forms when a price movement test support and resistance levels twice and unable to break. Often used to signal an intermediate or long trend reversal.

The double top indicates that after two unsuccessful attempts to push prices higher, the market trend reverse.

HOW TO RECOGNIZE

(i) PRIOR TREND: A double top chart pattern will form after an extended uptrend.

(ii) FIRST PEAK: First peak forms the highest point of the current trend.

(iii) TROUGH: After the first peak, there must be a decline of 10-20%.

(iv) SECOND PEAK: Price goes up from the lows and forms a second peak which respects the resistance of the previous peak. As the second peak don’t able to break the previous resistance level. This is a strong sign that the buying pressure is just about to end.

(v) DECLINE ROM SECOND PEAK: A subsequent decline off-price will witness from the second peak and volume generally increase.

(vi) SUPPORT BREAK: Price should break the support made by the previous trough.

FEATURES AND LIMITATION

(i) It looks like “M”

(ii) It is a strong reversal pattern. So you should be look for it after an extended period of uptrend. If you notice a double top in a side wise trend, than most probably it is a faulty pattern.

(iii) The duration of double top is more than 1 month.

(iv) The retracement should be more than 10%. Less than 10% indicates faulty pattern.

HOW TO TRADE

With the double top we would place our entry order just below the neckline (break out) because we expect a downtrend. We place our stop loss just above the neckline. We should place our target below the neckline the same as the height of peaks from the trough.

Double top is a ‘topping’ position. So take short position and avoid long position.

The reward should be twice or more than the risk.

REVERSAL CHART PATTERN (1)

2. TRIPLE TOP

DEFINITION

The triple top is a bearish reversal pattern. As name suggest the triple top is made up of three consecutive peaks that are roughly the same height.

This pattern forms when a price movement test support and resistance levels three times and unable to break. Often used to signal an intermediate or long trend reversal.

The triple top indicates that after three unsuccessful attempt to push price higher, the market trend reverse.

Triple top bearish reversal chart pattern

HOW TO RECOGNIZE

(i) PRIOR TREND: A triple top chart pattern will form after an extended uptrend.

(ii) FIRST PEAK: First peak forms the highest point of the current trend.

(iii) FIRST TROUGH: After the first peak, there must be a decline of 10-20%.

(iv) SECOND PEAK: Price goes up from the lows (first trough) and forms a second peak which respect the resistance of the previous peak.

(v) SECOND THOUGH: After the second peak price will go down till the support forms by the previous trough.

(vi) THIRD PEAK: Price goes up from the second trough and forms a third peak which respect the resistance of the previous two peak. As the third peak don’t able to break the previous resistance level. This is a strong sign that the buying pressure is just about to end.

(vii) DECLINE FROM third PEAK: A subsequent decline off price will witness from the third peak and volume generally increase.

(viii) SUPPORT BREAK: Price should break the support made by the previous trough.

FEATURES AND LIMITATION

(i) It looks like “”.

(ii) This is also intermediate to long tern pattern. If you identify it in a day chart better confirm the signal with other indicators before taking any trade.

(iii) The duration of triple top is more than 1 month.

(iv) The retracement should be more than 10%. Less than 10% indicates faulty pattern.

HOW TO TRADE

With the triple top, we would place our entry order just below the neckline (break out) because we expect a downtrend. We place our stop loss just above the neckline.

We should place our target below the neckline the same as the height of peaks from the trough.

Double top is a ‘topping’ position. So take short position and avoid long position.

The reward should be twice or more than the risk.

BULLISH REVERSAL CHART PATTERN:

1. DOUBLE BOTTOM

double bottom reversal chart pattern

DEFINITION

The double bottom is a bullish reversal pattern. As the name suggests the double bottom is made up of two consecutive troughs that are roughly equal.

This pattern forms when a price movement test support and resistance levels twice and unable to break. Often used to signal an intermediate or long trend reversal.

The double bottom indicates that after two unsuccessful attempts to push price lower, the market trend reverse.

HOW TO RECOGNIZE

(i) PRIOR TREND: A double bottom chart pattern will form after an extended downtrend.

(ii) FIRST TROUGH: First trough forms the lowest point of the current trend.

(iii) PEAK: After the first trough, there must be an advance of price of about of 10-20%.

(iv) SECOND THOUGH: Price goes down from the top(peak) and forms a second trough which respects the support of the previous bottom. The second Trough don’t able to break the previous support level. This is a strong sign that the selling pressure is just about to end.

(v) ADVANCE FROM SECOND TROUGH: A subsequent advance of price will occur from the second trough and volume generally increase.

(vii) RESISTANCE BREAK: Price should break the resistance, made by the previous trough.

FEATURES AND LIMITATION

(i) It looks like “W”

(ii) It is a strong reversal pattern. So you should be look for it after an extended period of downtrend. If you notice a double bottom in a side wise trend, then most probably it is a faulty pattern.

(iii) The duration of double bottom is more than 1 month.

(iv) The advancement of price should be more than 10%. Less than 10% indicates faulty pattern.

HOW TO TRADE

With the double bottom, we would place our entry order just above the neckline (break out) because we expect an uptrend. We place our stop loss just below the neckline. We should place our target above the neckline the same as the height of the peak from the troughs.

Double bottom is a ‘bottoming’ position. So take long position and avoid short position.

The reward should be twice or more than the risk.

ALSO READ: Double Bottom Reversal

2. TRIPLE BOTTOM

DEFINITION

The double bottom is a bullish reversal pattern. As the name suggest the double bottom is made up of two consecutive troughs that are roughly equal.

This pattern forms when a price movement test support and resistance levels twice and unable to break. Often used to signal an intermediate or long trend reversal.

The double bottom indicates that after two unsuccessful attempts to push prices lower, the market trend reverse.

TRIPLE BOTTOM REVERSAL CHART PATTERN

HOW TO RECOGNIZE

i) PRIOR TREND: A triple bottom chart pattern will form after an extended downtrend.

(ii) FIRST TROUGH: First trough forms the lowest point of the current trend.

(iii) FIRST PEAK: After the first trough, there must be a advances of 10-20%.

(iv) SECOND TROUGH: Price goes down from the top (first peak) and forms a second trough which respect the support of the previous bottom.

(v) SECOND PEAK: After the second trough price will go up till the resistance forms by the previous peak.

(vi) THIRD TROUGH: Price goes down from the second peak and forms a third trough which respects the support of the previous two trough. The third trough don’t able to break the previous support level. This is a strong sign that the selling pressure is just about to end.

(vii) ADVANCE FROM third TROUGH: A subsequent advance of price will occur from the third trough and volume generally increase.

(viii) RESISTANCE BREAK: Price should break the resistance made by the previous peak.

FEATURES AND LIMITATION

(i) It looks like “”.

(ii) It is a strong reversal pattern. You should be looking for it after an extended period of downtrend. If you notice a triple bottom in a sidewise trend, then most probably it is a faulty pattern.

(iii) The duration of triple bottom is more than 1 month.

(iv) The advancement of price (in the peaks) should be more than 10%. Less than 10% indicates faulty pattern.

HOW TO TRADE

With the triple bottom, we would place our entry order just above the neckline (break out) because we expect an uptrend. We place our stop loss just below the neck

Triple bottom is a ‘bottoming’ position. So take long position and avoid short position.

The reward should be twice or more than the risk.

In conclusion, the reversal chart pattern indicates a reversal of the trend. They are formed pretty often in the chart pattern. There are many more reversal chart pattern.

ALSO READ:

  1. WEDGE PATTERN
  2. CONTINUATION CHART PATTERN
  3. HEAD AND SHOULDER CHART PATTERN
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