REVERSAL PATTERNS

The following are examples of how you can identify a reversal.

ASCENDING TRIANGLE

An ascending triangle is a bullish chart pattern used in technical analysis that is easily recognisable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs. Traders enter into long positions when the price of the asset breaks above the top resistance.

DESCENDING TRIANGLE

A bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support. Traders watch for a move below support, as it suggests that downward momentum is building. Once the breakdown occurs, traders enter short positions and aggressively push the price of the asset lower.

DOUBLE TOP

A double top describes the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop. The double top looks like the letter “M”. The twice touched high is considered a resistance level.

DOUBLE BOTTOM

A double bottom describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound. The double bottom looks like the letter “W”. The twice-touched low is considered a support level.

HEAD AND SHOULDERS

A head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal. The head and shoulders pattern is believed to be one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end. This pattern is comprised of three component parts:

1) After long bullish trends, the price rises to a peak and subsequently declines to form a trough.

2) The price rises again to form a second high substantially above the initial peak and declines again.

3) The price rises a third time, but only to the level of the first peak, before declining once more.

The first and third peaks are shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the neckline.

Head and shoulders patterns can also signal that a downward trend is about to reverse into an upward trend. In this case, the stock’s price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head) and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed and prices are likely to keep moving up.

The danger of this pattern is that it could be forming a triangle, since a trend in motion is more likely to continue north!

EXPANDING TRIANGLES

Expanding triangles are rarer than standard triangles. 3 points need to be joined and the breakout came from a violation of the support followed by a lower high