Reversal Patterns


What are Reversal Chart Patterns?

Reversal patterns are chart patterns, which are formed as a result of the trend being changed. When an up trend changes to a down trend or when a down trend changes to an up trend, it is not usually sudden and dramatic. It slows down, pulls back, goes in the direction of the trend, comes back.

Imagine how huge truck changes direction if it wants to go back in the same road it came.

Like wise the prices makes up and down swings before a trend change. These up and down swings constitute reversal chart patterns

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How Reversal Chart Patterns are formed?

A change in the trend results because of the change in the perception of the price of a given stock. This causes change in the placement of orders. This changes the force of the two elements - supply and demand - that moves the price up and down.

In an up trend, as the price reaches a point where traders think that the price reached is optimum or even high for that particular stock. So profit booking starts. This increases supply bringing the price down. At a lower level the price of a stock appears attractive to buy. The demand increases but not as much as it was earlier.

As the price move up traders sense the lower momentum of price rise. This drives still more traders to book profit. At this stage many more are planing to go short. Now the supply doubles bringing the price down. Those who entered market late are now in the loss and they want to cut short the losses. The increased supply ultimately changes the trend from up to down.

In a down trend, as the price reaches a low point where traders think that the price is attractive to buy. So accumulation starts. This increases demand pushing the price high. At higher level the sellers continue to sell, which brings the price down. At a lower level the price of a stock appears attractive to buy which increases the demand.

This sort of tug of war between buyers and sellers makes price to swing between optimistic and pessimistic perception level of the price. This creates reversal patterns on the stock charts before the trend changes to opposite side.


What is the significance of Reversal Chart Patterns?

Having a good knowledge of reversal patterns allows us to speculate positively about the end of the trend. We can square off our position at a right time to book maximum profits. It also allows us to take position in the opposite direction, at the right time. Early entry ensures smaller stop loss. Smaller stop loss decreases the risk and increases the risk to reward ratio.

On the whole good knowledge of reversal patterns allows us to have smaller losses and larger profits.

These can be bullish reversal patterns or bearish reversal patterns. 



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    Some of the common chart patterns, after which the trend may reverse are: 

  • Head and Shoulder
    Head And Shoulder is one of the very common and profitable reversal chart patterns. It is very reliable with 90% probability.
  • Reverse Head and Shoulder
    Reverse Head and Shoulder is one of the very profitable bullish reversal chart patterns seen in a downtrend. It is very reliable with 90% success rate.
  • Double Bottom
    Double Bottom is a reversal chart patterns, where a stock in a down trend, hits a support level twice and reverses to continue in an up trend.
  • Double Top
    Double Top is a reversal chart patterns, where a stock in an up trend, hits a resistance level twice and reverses to continue in a down trend.
  • Triple Bottoms
    It is a reversal chart pattern.
  • Triple Top
    Triple Top is a reversal chart patterns, where a stock in an up trend, hits a resistance level thrice and reverses to continue in a down trend.
  • Trend line Breaks
    Trend Line Break is a reversal chart patterns, where a stock in an up trend, breaks out of a support trend line and a stock in a down trend, breaks out of a resistance trend line.
  • Multiple Tops
    Multiple Tops is a reversal chart patterns, where a stock in an up trend, hits a resistance level several times and reverses to continue in a down trend.
  • Gaps Formation
    Gaps are continuation chart pattern, formed by an unfilled space between two trading session. Gaps are referred as Tasuki, meaning window in candlestick charting. It can also be a reversal chart patterns.
  • Island Formations
    Island Formation is a reversal chart pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
  • Abandoned Baby
    Abandoned Baby is a reversal chart pattern, formed by price action in a single time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
  • Broadening Bottom
    It is a reversal chart pattern.
  • Broadening Top
    It is a reversal chart pattern.
  • Cup and Handle
    It is a reversal chart pattern.


    Here are some chart patterns after which trend may continue or may reverse. 

  • Ascending Triangle
    Ascending Triangle is a chart pattern, characterized by horizontal top and rising bottom. This is created when a bullish market pushes the price up against a resistance level. It can be both continuation and reversal chart patterns.
  • Descending Triangle
    Descending Triangle is a chart pattern, characterized by horizontal bottom and sloping top. This is created when a bearish market pushes price down against a support level. It can be both continuation and reversal chart patterns.
  • Symmetrical Triangle
    Symmetrical Triangle is a chart pattern, characterized by converging top and bottoms. This is created when there is indecision in the direction of the market. It can be both continuation and reversal chart patterns.
  • Channel Formation
    Rectangle Formation can be both continuation and reversal chart patterns. The stock prices tend to move between two horizontal support and resistance lines.




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Click here to learn about Candlestick Patterns. 

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