Trading in the financial markets is a challenging venture, particularly because of the uncertainties that come along with fluctuations in price dynamics. By studying and understanding numerous trading strategies and technics, traders can get a clue of future price changes. Of these technics, one of the most effective and reliable are reversal patterns. In chart analysis, reversal patterns are seen as crucial signals of the long-term trend ending. If accurately spotted, they can aid in providing great trading opportunities. Throughout this article, we will delve into some of the best reversal patterns used in trading strategies.
1. The Head and Shoulders Pattern
Named due to its resemblance with a human head and shoulders, this is one of the most reliable patterns in predicting reversals. The pattern consists of a peak (head), flanked by two lower peaks (shoulders). The support level, also known as the neckline is drawn through the lowest points of the two troughs. A confirmed head and shoulders pattern is a strong sell signal, as it indicates that the price action will start to move in a downward direction.
2. The Double Top and Double Bottom
These are also popular reversal patterns used in chart analysis. A double top, as denoted by the name, consists of two peaks forming at approximately the same level, illustrating a level of resistance. When the price drops below the support level following the two peaks, it’s a sell signal. A double bottom is the inverse of the pattern, with two lows at roughly the same level demonstrating a support zone, and an upturn beyond the resistance level is a sign to buy.
3. Triple Top and Triple Bottom
These patterns are a more robust version of the double top and bottom, consisting of three peaks or troughs at approximately the same level. A triple top signifies a downward reversal after the price drops the support level, while a triple bottom is an indicator for an upward trend if price surpasses the resistance level.
4. The Saucer Pattern
The saucer pattern, also referred to as a rounding bottom/top, shows a gradual change in the trend, typically observed over the long term. It appears to round in shape, representing a slow-motion reversal before the trend finally changes direction. For a saucer pattern, the buy signal is on an upward trend, and the sell signal on a downward trend.
5. Cup and Handle Pattern
This pattern represents a cup in a form of a U and a handle on the right. It identifies a bullish signal
