Advertisement
Basic Chart Patterns

Reversal Patterns

While a continuation pattern suggests that a trend in place will continue in the same direction after a brief pause/correction, a failed continuation pattern may well turn into a reversal pattern. Like their name implies, reversal patterns suggest that one trend is ending and the market is ready to begin another trend in the opposite direction or, perhaps more likely, to move sideways for a while.

As with continuation patterns, a trend line or key support or resistance areas are points to watch. If prices rebound from these areas, a continuation pattern remains intact. If prices break through a trend line or triangle boundary and then follow through with the breakout, this is the best evidence of a trend reversal.

Keep in mind that all chart patterns apply to all trading time frames – daily, weekly, monthly, yearly, hourly or even minute-by-minute bar charts. Also, an important consideration in determining the validity of any price pattern is the pattern of volume accompanying the price move. A price breakout on heavy volume gives the reversal pattern more credibility than a breakout on light volume.

These patterns provide clues about possible price direction but do not predict what prices will do. Their main value often comes from honing in on the price action to identify price parameters and points where a trader may want to take action.

Below are some of the main reversal patterns you might see on a price chart. Note that some of them might also be considered continuation patterns, depending on price action, length of time, location on the chart and what the trader “sees” or wants to see – a subjective determination that supports the contention that chart reading is an art, not a science.

Double Tops and Double Bottoms

M Tops and W Bottoms

Head-and-Shoulders Formation

Wedges

Descending and Ascending Triangle

Rounding Bottom or Cup-and-Saucer

Diamonds