Today’s Quick lesson is all about reversal patterns. I adore reversal patterns mainly because, again as in everything in the market, it is a potential way to spot a shift in direction. Because I am such a small risk 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, 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.
But first, take a look at the video. It will be easier for you to understand the rest of the text
Recommended Read: The Best Price Action Patterns In Day Trading
The first example will be about the group’s double top, then a double bottom, and the other one is the head and shoulders.
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. They are the most precise. And look what happens. Then, we head down.
So when you’re looking from afar. It is a nice way of understanding that something is shifting when you are seeing a 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.
Here’s 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.
So the price action was going down. But then as double bottom forms and the MACDS start giving me an excellent divergence. Finally, it started going up.
Related Read: Is Pattern Day Trading Illegal?
Last are 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.
This is what the head and shoulders would look like for the downtrend.
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.
Recommended Read: Trading days in a year
So if you have any questions you can always ask me at traderchick.com and if you want to learn day trading basics – check out Day Trading Courses.