Reversal Stocks Trading Patterns

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

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

This learn stock trading 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 stock trading pattern which forms after an extended upward stocks trend. As its name implies, this formation is made up of two consecutive peaks which are roughly equal, with a moderate trough between.

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

In Stock, this formation is used as a early warning signal that a bullish stock trend is about to reverse. However, it is only confirmed once the neckline is broken and the stocks market moves below the neckline. Neckline is just another name for the last support level formed on Stock chart.

Summary:

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

The double top look like an M-Shape, the best reversal stock 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 downwards stock trend line as shown below. If a trader opens a sell stock signal the stop loss will be placed just above this downward stock trend line.

M-Shaped

Double Bottom

This is a reversal stock trading pattern that is formed after an extended downward stocks trend. It is made up of two consecutive troughs which are roughly equal, with a moderate peak between.

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

In Stock, this formation is an early warning signal that the bearish stock 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 level for the stock price. Once this resistance is broken the stocks market will move up.

Summary:

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

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

W-Shaped