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What Are Reversal Patterns?

Hi, I’m Marina Kuperman Villatoro, the Trader Chick. 

And today’s quick lesson is all about reversal patterns. I absolutely adore reversal patterns mainly because, again as in everything in the market, it is a potential way to spot a shift in direction. 

But first, take a look at the video. It will be easier for you to understand the rest of the text.

Because I am such a small risk/scalper type of trader, for me a shift in direction could stop me out and make it a loss.

So whenever I start to notice reversal patterns, I slow down, I become more aware, and wait for the market to tell me what is going on. 

Today I’m going to talk about two different reversal patterns. The first will be the “double top/double bottom”, and the other one is the “head and shoulders”.

I also want to make clear that reversal patterns and other popular chart patterns are one aspect of trading technical analysis and are part of the fundamental knowledge in day trading principles and financial markets that all traders must have in order to succeed.

Recommended Read: The Best Price Action Patterns In Day Trading

Double Top Reversal Pattern

So what exactly is a double top? In this first example, we see an uptrend. It is taking us straight up, and all of a sudden we have an area here, and then it changes direction. It’s a much steeper retracement, and then it comes back up.

It is a perfect double top, double tops are pretty precise. They’re usually within one or two ticks at the most. And I prefer when it’s really right on the pivot (see image above) or maybe one tick higher for one. They are the most precise. And look what happens. BAM – we head down. 

So when you’re looking from afar, this is a really nice way of understanding that something is shifting when you are seeing a reversal pattern.

perfect example of a double top reversal pattern.
Above you can see a perfect example of a double top reversal pattern.

With a double top, we have this particular even ground with price action and then when we look at the MACDs, there is divergence.

So when you have a reversal pattern and a divergence, that is an even higher probability that the market will shift direction.

With a double top, we have this particular even ground with price action and then when we look at the MACDs, there is divergence. So when you have a reversal pattern and a divergence, that is an even higher probability that the market will shift direction.

reversal pattern divergence
Double bottom reversal pattern with divergence in price action and the MACD’s

Double Bottom Reversal Pattern

The image above shows another example, now it is a double bottom. 

This is what I was talking about before when I mentioned that they can be within one tick. You see, it’s not precise. However, it is giving me a double bottom. 

And on top of that the price action is going down. But then as double bottom forms and the MACDS start giving me an excellent divergence. 

So the market has been going down, then we’ve hit this particular double bottom area. And then it starts going up – a reversal.

How far it goes up I don’t really care because that’s not for me to know. But what I do know is that there is going to be a shift in direction after reading this double bottom reversal bottom. And that’s what the most important part about it is.

Related Read: Is Pattern Day Trading Illegal?

Head and Shoulders Reversal Pattern

The second very popular reversal pattern is called a head and shoulders. So this is what a head and shoulders look like. Head and shoulders do not need to be precise and it could be on a bigger scale frame as well. Doesn’t have to be as micro. 

So with the pattern you can see a shoulder, a head and another shoulder and this pattern would be inverted with a downtrend i.e an ‘upside down head and shoulders’.

So again they’re not that easy to see, but with time you will start to notice the head and shoulders. However, the head and shoulders are a huge indication because after this slowdown the market tries to run down, it just doesn’t go anywhere, and it continues in this direction and that’s when I’m seeing. OK. There’s definitely going to be a change in direction, and that’s exactly what happens. It starts to head up.

head and shoulder reversal pattern
Head and shoulders reversal pattern from an uptrending market reversing into a downtrend

So now let’s look at a head and shoulders from the uptrend going down and here it is.

And this is a bigger scale. As I said scales are not as precise as they are with the double bottom/double top.

So this is a perfect head and shoulders.

We’ve been going up. And now we’re starting to see some slow down. A big retracement and it tries to go back up again but it doesn’t.

The market simply does not want to go up. And the buyers lose out and the sellers take over.

So this is another excellent indication that the market will be switching direction.

*Very important to remember, just because you’re seeing all this, do not automatically get in. You want confirmation before you enter in to your trading plan style. Also try not to get overwhelmed with the chart patterns and indicators and simplify your trading as much as possible in order to become a more consistent and profitable trader over time.

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