Reversal Trading Pattern Setups

These patterns are formed after the market has had an extended move up or down and the 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 and start using them. There are four types:

• Double Tops
• Double Bottom
• Head and shoulders
• Reverse Head and shoulders

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

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

In Energies, this formation is used as a early warning trading signal that a bullish trend is about to reverse. However, it's only confirmed once the neckline is broken & the market moves below the neckline. Neckline is just another name for the last support level formed on the 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 signal is where the second top is lower than the first one as pictured below, this means that the reversal can be confirmed by drawing a down ward trendline as shown below. If a trader opens a sell trading signal the stop loss will be placed just above this downwards trendline.

M-Shaped

Double Bottoms

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

This formation is considered complete once price makes the second low & then penetrates the highest point between the lows, called the neckline. The buy indication from this bottoming out signal occurs when the market breaks the neckline to the upside.

In Energies, this formation is an early warning trading signal that the bearish trend is about to reverse. It is only considered complete/confirmed once the neckline is broken. In this formation the neckline is the resistance zone for the price. Once this resistance is broken the market will move up.

Summary:

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

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

W-Shaped