Reversal patterns indicate a high probability that the existing trend has come to an end and that there is good chance of the trend reversing direction. They give entry signals early in the formation of a new trend, making their entries quite lucrative, with fairly small protective stops. However, the trend might not reverse immediately and may enter a trading range instead.
As with continuation patterns, there must be an existing trend that is to be reversed. Without a pre-existing trend reversal patterns are not valid. The common reversal patterns include double tops and double bottoms, triple tops and triple bottoms, head and shoulders, rising and falling wedges, and the less common rounded tops and rounded bottoms.
The Double Tops patterns appear at the end of an uptrend when the price reaches the previous resistance level but fails to break through the resistance. The result is two price peaks with the same high. The entry point in this pattern is when the price moves below the minor low between the two peaks. This will result in a lower low and the start of a downtrend.
The Double Top pattern is confirmed when the support at the bottom of the recent low is broken and indicates an intermediate to long-term change of the ...
Head and Shoulders
The head and shoulders pattern is one of the most reliable trend reversal patterns and usually occur at the end of an uptrend, where it is also called a Head and Shoulders Top. They can occur at the end of a downtrend, where they are also called a Head and Shoulders Bottom or Inverted Head and Shoulders. A Head and Shoulders pattern is named for the three highs in an uptrend or the three lows in a downtrend which form a left shoulder, the head, and a right shoulder.
Head and Shoulders Tops tend to be more reliable than Head and Shoulders Bottoms. A ...
Support and Resistance
Support and Resistance lines are often confused with trend lines but they are horizontal lines under the lows and above the highs respectively. They indicate where a previous rally met resistance and where a previous decline met support. These are two important levels in terms of trend identification since an uptrend will tend to break previous resistance levels above the market while a down trend will break the previous support levels below the market.
When the support line below the recent minor low in broken in an uptrend, it indicates that ...
Trend lines play an important role in identifying chart patterns as they draw the chartist's attention significant price levels. Trend lines are relatively easy to draw. In an uptrend, which is characterized by higher highs and lower lows, a support trend line is drawn below two or more correction lows. If the trend line connects only two correction lows, it is a tentative trend line and is only confirmed when the price touches the line for a third time without breaking that line.
When a trend line has been identified, it can used to identify areas of potential support or ...
Continuation patterns indicate that there is a greater probability of the continuation of a trend than a trend reversal.. These patterns are generally formed when the price action enters a consolidation phase during a pre-existing trend. During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable.
Some of the common continuation patterns include the cup and handle pattern, flags and pennants, symmetrical triangles, ascending triangle and desc...