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
Pattern Trading gives us consistent, profitable trades.
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.
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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