Reversal Trading Pattern Setups

These patterns are formed after the commodity market has had an extended move up or down and the trading price reaches a strong resistance or support respectively.

When price reaches such a point it starts to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how & start using them. There are four types:

• Double Top
• Double Bottom
• Head and shoulders
• Reverse Head & shoulders

This learn commodity tutorial will only cover double tops and bottoms, for the other 2, read this other tutorial: head & shoulders and reverse head & shoulders

Double Tops

This is a reversal commodity pattern that forms after an extended upwards trend. As its name implies, this pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough between.

This formation is considered complete once trading price makes the second peak & then penetrates the lowest point between the highs, called the neck-line. The sell commodity signal from this formation occurs when the commodity market breaks-out below the neck line.

In Commodities, this formation is used as a early warning signal that a bullish commodity trend is about to reverse. However, it's only confirmed once the neckline is broken & the commodity market moves below the neckline. Neckline is just another term for the last support level formed on Commodities chart.

Summary:

• Forms after an extended move upwards
• This formation indicates that there will be a reversal in market
• We sell when price breaks below the neck line point: see below for explanation.

The double tops look like an M Shape, the best reversal commodity signal is where the second top is lower than the first one as shown below, this means that the reversal can be confirmed by drawing a down ward commodity trendline as shown below. If one opens a sell commodity signal the stop loss will be placed just above this downward commodity trend line.

M Shaped

Double Bottom

This is a reversal commodity pattern that forms after an extended down-wards trend. It is made up of 2 consecutive troughs that are roughly equal, with a moderate peak between.

This formation is considered complete once trading price makes the second low and then penetrates the highest point between the lows, called the neck-line. The buy indication from this bottoming out signal forms when the commodity market breaks-out the neckline to the upside.

In Commodities, this formation is an early warning trading signal that the bearish commodity trend is about to reverse. It's only considered complete/completed once the neck line is broken. In this formation the neckline is the resistance zone for the trading price. Once this resistance is broken the commodity market will move up.

Summary:

• Forms after an extended move downward
• This formation indicates that there will be a reversal in market
• We buy when price breaks above the neck line point: see below for explanation.

The double bottom pattern look like a W Shape, the best reversal commodity signal is where the second bottom is higher than the first one as shown below, this means that the reversal can be confirmed by drawing an up-wards trendline as shown below. If a trader opens a buy commodity signal the stop loss will be placed just below this upward commodity trend line.

W Shaped