Reversal Patterns You Have to Know in Trading

Having years of experience combined with textbook knowledge alone does not make you a great trader. You also need to be a good observer because that’s what gives you an edge. It doesn’t matter if you are in the online trading business for years or you just started, you would just kill to have a tool that lets you predict the market behavior with 100 percent accuracy. The only problem is, such tools don’t exist.

But it’s not the end of the world, traders still have access to some instruments that can help them make decisions. One of them is reversal patterns. As a trader, you couldn’t agree more with this. If you could tell when a trend will change its direction; this is a very valuable piece of information.

What Are Reversal Patterns?

So what are reversal patterns exactly? They are chart patterns that form when a trend changes. Whenever a trend changes from up to down or down to up, it doesn’t happen all of a sudden. In fact, the trend slows down, pulls back and then goes in the direction and comes back.

Experienced traders use these patterns to gain an edge by entering into the emerging market direction.

Types of Reversal Patterns

Are you looking forward to gaining an edge, too? Fortunately, with the help of reversal patterns, you can predict what trading move to make. So here are the patterns you must know in order to trade and make the most from the market opportunity:

Head And Shoulders

Traders use this reversal pattern in live trading to a great extent. This can create a pattern of two shoulders and one head. It also explains why it’s named “head and shoulders.” It’s like baseline having 3 peaks. Traders use it for predicting bullish to bearish reversal trends. It’s considered to be one of the most reliable patterns. It indicates that an upward trend is about to come to its end. This pattern is formed when the price of a stock goes to its peak. Then it declines back to its base. In short, it is a signal that a downward market trend is about to become an upward trend.

Doji Candlestick

The structure of Doji candlestick is quite easy to recognize. Remember it is a single candle pattern. It’s created when the opening price and closing price are the same during a particular period. The Doji candle in this state looks like a cross. This pattern appears after a prolonged price move or when there is no volatility in the market.

Doji associates with market exhaustion or indecision. It’s formed when a prolonged trend stays in the market. You hence have a potential for a strong reversal. The candle in the chart represents that the market riders are no longer able to pressure the price in one direction. The direction reserves when the bearish and bullish forces start equalizing.

Rounding Top

This pattern represents a gradual change of market sentiments from bullish to bearish. This pattern is used in technical analysis indicating price movements forming an upside down “U” shape. It might form at the end of the upward trend indicating a reversal in the prolonged price movement. This pattern is rare and it takes weeks, months or maybe even years to develop it.

Rounding Bottom

This pattern indicates that the price changed gradually from the downtrend. It is also used in technical analysis. The rounding bottom forms at the end of the prolonged downward trend signifying a reversal in the long-term price movement. The frame of the pattern varies from weeks to months. It also occurs rarely. Price and volume move in tandem and the volume confirms price action.

Triple Bottom

It’s a bullish pattern interpreting a buying signal. It’s formed by three equal lows and then a sudden surge in the price extending beyond the level of resistance. This visual pattern shows that the buyer is controlling the price action from the seller. When a triple button is formed, it is an opportunity to enter the bullish position.

The first bottom is normal price movement. The second bottom is the indication of bulls gaining momentum and preparing for a reversal. Lastly, the third bottom indicates that there is strong support, and once the price breaks through the level of resistance, the bears can capitulate.

Diamond

This reversal pattern is a little tricky because it is not easy to spot a diamond on the graph. You can find this pattern when a strong positive trend is coming. It indicates that another trend reversal is on its way. It’s also an indication of opening a sell position.

Diamond is uncommon but when it forms, it is a strong indicator for a reversal. If you have been in the trading business for years, you would agree that detecting reversal is extremely profitable. Diamond forms only when an uptrend ends.

Final Words:

Even though you would be using these patterns for CFD stock trading, remember that none of these patterns is 100% accurate. Of course, you can count on them for spotting the trend reversal possibilities but it is also recommended to use some additional tools for accuracy.