Top Reversal Chart patterns

Reversal Patterns are chart patterns that indicate reversal of a trend when price breakouts of the pattern

Let’s understand in detail top 8 reversal chartpatterns.

1. Double Top

 The Double Top is a very popular reversal pattern you would see on top of an existing uptrend of a stock.

It signifies that the upward trend is losing steam and we could see a possible reversal of the trend.

In other words, the chartpattern formation indicates end of bullish sentiment and start of bearish sentiment could be seen in the stock.

As one could easily understand from the name of the pattern, there would be 2 Price peaks separated by a trough in between.

A horizontal line could be drawn passing the trough to form a Neckline of the pattern.

The psychology behind Double Top chart pattern

 In an existing uptrend, buyers are very bullish and pushed the price to a new high. This creates the 1^st peak of the pattern.

At this peak, sellers become very aggressive and start selling the stock to push the price down till the trough.

Buyers have not lost steam yet and hence we can see renewed pressure from the buyers near the trough.

This pushes the price upwards towards the previous new high (peak). The price almost touches the new high or peak to form a 2^nd peak.

At the 2^nd peak, sellers again overwhelm the buyers and pushes down the price further below the neckline.

Most of the buyers who went long exited at this point. Once neckline is broken, there would be high sell volume to break the upwards trend momentum and start a price decline further down.

How to trade Double Top pattern?

• Traders should look to trade Double Top Pattern on short side, as it is a bearish reversal formation.
• Check for Double Top formation in a stock which had been on uptrend for some time.
• When neckline of the patterns is broken on daily chart, we need to put our Short sell order just below the neckline.
• Stop Loss could be placed a notch above the neckline (depending on your risk appetite)
• Target Price as height of the peaks from neckline.

I mean, Target Price would be targeted at a price below neckline taking the same distance as height of the peaks from the neckline. In our above example, the distance is marked as “a”

Let’s understand this through a chart

2. Double Bottom

 Similar to the Double Top, Double Bottom is also one of the popular reversal chartpatterns you would see on bottom of an existing downtrend of a stock.

The chart pattern formation indicates end of bearish sentiment and start of bullish sentiment in the stock.

As with Double Top, there would be 2 Price Bottom separated by a price crest in between. A horizontal line could be drawn passing the trough to form a Neckline of the pattern.

Logic behind this chart pattern

 In an existing downtrend, sellers are very bearish and pushed the price to a new low. This creates the 1^st bottom of the chart pattern.

At this price, buyers start aggressive buying of the stock to push the price up to form the crest.

We can then see renewed pressure from the sellers near the crest to push the price downwards. The price almost touches the new low or bottom to form the 2^nd bottom.

At the 2^nd bottom, buyers again overwhelm the sellers and pushes down the price further up the neckline.

There would be high buy volume to break the downward trend momentum and start a price uptrend

How to trade Double Bottom chart pattern?

• Traders should look to trade Double Bottom Pattern on the long side, as it is a bullish reversal formation.
• Check for Double Bottom formation in a stock which had been on downtrend for some time.
• When neckline of the Double Bottom patterns is broken on daily chart, we need to put our Buy order just above the neckline.
• Stop Loss could be placed a notch below the neckline (depending on your risk appetite)
• Target Price as height of the 2 bottoms from neckline.

Let’s understand this pattern through the below chart

3. Head & Shoulder Pattern

Head and shoulder is a chart pattern in which a large peak or head has slightly smaller peaks or shoulders on either side of it.

Typically, the first and third peak will be almost equal in height but there could be slight differences in their height in real trading scenario. What’s more important is for both left and right peaks to be shorter in height than the second peak.

All the 3 peaks will fall back to the same level of support, which is called the ‘neckline’
This pattern will be formed in last leg of a bullish trend. Traders look at head and shoulders patterns to predict a bullish-to-bearish reversal.

How to trade Head & Shoulder pattern?

• Traders should look to trade Head & Shoulder Pattern on the Short side, as it is a bearish reversal formation.
• Check for Head & Shoulder formation in a stock which had been on downtrend for some time.
• When neckline of the Head & Shoulder pattern is broken on daily chart, we need to put our Short Sell order just below the neckline.
• Stop Loss could be placed a notch above the neckline (depending on your risk appetite)
• Target Price as height of the Head from neckline.

4. Inverse Head & Shoulder Pattern

Inverse Head and Shoulder Pattern is the opposite of the Head & Shoulder Pattern. This pattern will usually be formed in last leg of a bearish trend.

Traders look to trade Inverse head and shoulders patterns as a bearish-to-bullish reversal formation.

How to trade Inverse Head & Shoulder pattern?

• Traders should trade Inverse Head & Shoulder Pattern on the Buy side, as it is a bullish reversal formation.
• Check for Inverse Head & Shoulder formation in a stock which had been on downtrend for some time.
• When neckline of the Head & Shoulder pattern is broken on daily chart, we need to put our buy order just above the neckline.
• Stop Loss could be placed a notch below the neckline (depending on your risk appetite)
• Target Price as height of the Head from neckline.

5. Triple Top Pattern

The psychology behind the formation of a triple top pattern is similar to a Double Top formation. The only difference here is that there are 3 peaks, instead of 2 peaks in Double top.

How to trade Triple Top chart pattern?

• Traders should look to trade Triple Top Pattern on short side, as it is a bearish reversal formation.
• Check for Triple Top formation in a stock which had been on uptrend for some time.
• When neckline of the patterns is broken on daily chart, we need to put our Short order just below the neckline.
• Stop Loss could be placed a notch above the neckline (depending on your risk appetite).
• Target Price as height of the peaks from neckline.

6. Triple Bottom Pattern

The psychology behind the formation of a triple top pattern is similar to a Double Bottom formation. The only difference here is that there are 3 bottoms, instead of 2 bottoms in Double Bottom.

How to trade Triple Bottom chart pattern?

• Traders should look to trade Triple Bottom Pattern on the long side, as it is a bullish reversal formation.
• Check for Triple Bottom formation in a stock which had been on downtrend for some time.
• When neckline of the Triple Bottom pattern is broken on daily chart, we need to put our Buy order just above the neckline.
• Stop Loss could be placed a notch below the neckline (depending on your risk appetite).
• Target Price as height of the bottoms from neckline.