Reversal Chart Patterns and their meaning

Ideally, technical analysts in forex trading have relied on price patterns to draw on current trends and forecast future market trends. In the reversal pattern, the existing trend will pause, then resume in a different direction as new energy is generated from the opposite side, i.e., bulls or bears.

In the lesson for common types of forex charts and patterns, we discussed Reversed chart patterns as a common type. Essentially, when a reversal chart pattern forms, it signals a direction change in the current market trend.

When the reversal chart pattern occurs in an uptrend, it signals a reversal in the trend, so the price will fall within a short period. On the other hand, when the reversal chart pattern shows up in a downtrend, it indicates the price going up after some time.

Below are chart patterns that give reversal signals: -

1.      Double top – illustrates a short-term swing high with a preceding failed attempt to break at a higher point than the same resistance level

2.      Double bottom – illustrates a short-term swing low preceded by a failed attempt to break at a lower point than the same support level

3.      Head and Shoulder – shows two smaller price movements around a more considerable price movement

4.      Inverse Head and Shoulder

5.      Rising wedge

6.      Falling wedge

During market tops, reversals that occur at this juncture are referred to as distribution patterns, in which case the trading instrument is sold more than it is bought. Subsequently, reversals at market bottoms are referred to as accumulation patterns whereby the trading instrument is bought more than it is sold.

How to trade the reversal chart patterns?

Place an order above the neckline along the direction of the emerging new trend. Move on to a target nearly similar to the height of the formation.

Remember to place your stops. An ideal stop loss around the middle of the chart formation ought to be in place.