Catch big profits with reversal price patterns

Catch Big Profits (With Reversal Price Patterns)

Catch big profits with reversal price patterns

I’ve come to realise not many traders know the importance of the reversal price patterns you can use with your trading? So, if you don’t use these patterns you’re in the right place!

Did you know that having a solid Forex trading education, on the basic reversal price patterns is the starting point for any successful trader.

In my trading lesson today I will go through 4 reversal price patterns and how you can use these with your trading to catch big profits!

The patterns I will discuss for you to add to your trading…

are the double top and the double bottom pattern. The head and shoulders and the inverse head and shoulders pattern.

Even though these are the basic reversal plays you can use within the markets they are also some of the most profitable ones.

Reversal Plays

When using reversal price patterns, they are indicating a high probability of a reversal within the markets. Even more importantly they are showing a reversal of a trend.

Therefore stacking the odds in your favour as a trader when using reversal price patterns.

Look:

When a reversal formation appears within the charts, this in fact means. You are looking for price to move in the other direction from the move that precedes the formation.

As a trader you will need to pay close attention to these formations. With giving you a clue as to the current trend direction may be coming to an end.

The basic reversal price patterns I will cover

  • Double Top (formed at the end of a up trend)
  • Double Bottom (formed at the end of a down trend)
  • Head and Shoulders (formed at the end of a up trend)
  • The Inverse Head and Shoulders (formed at the end of a down trend)

The Double Top Reversal Pattern

My favourite reversal price pattern

One of my favourite reversal price patterns being the double top formation. Is a powerful reversal pattern which is used at the end of a up trending market.

The pattern is a very popular price pattern with traders alike. This is mainly because the high probability of the pattern giving you a great profit potential.

The double top price pattern will form at the top of an up trending market. The pattern will signal normally to traders, the potential trend is coming to an end with a reversal highly imminent. 

How does this pattern form?

The double top forms after a retrace within the up trend. This finds buyers creating a support bounce (called the baseline).

Many traders will be buying the market with the assumption of the continuation of the trend.

Continuation price pattern

Most likely using one of the bullish continuation price patterns that you can find in one of my other lessons here.

As price finds the previous high made, the sellers (or as commonly know as supply) reverse the market back down once again.

At this point with the pattern, is with it now creating the second bounce of the previous resistance it will therefore be creating the double top formation

As on the image below, you can see how this formation of the double top price reversal would look.

Always remember this technical pattern is never confirmed until the break and close below the baseline.

Where the blue line on the image below would represent the baseline which is classed as the entry point with a double top pattern.

In fact you can read more on what is the best solution to trading these technical patterns checking out another lesson of mine called-

“4 Forex market trading mistakes that cause you to lose profits! (+fixes)

double top reversal
Double Top

Entry criteria

With most reversal price patterns, the entry has two potential possibilities that could be applied. The typical entries that could be used with this formation-

  • Breakout of the baseline (blue dashed line) with a stop placed above the double top. (this being a more aggressive approach)
  • As on the image above, wait for a breakout and retest to catch a entry. (being a more conservative approach)

When it comes to the potential targets with this reversal pattern. 

You would look to target the distance from the double top to the baseline, and project this again from the baseline for the target. (know as the measured objective)

Check out what a double top reversal looks like on a real price chart…

Double top reversal price chart
Double Top Reversal

The Double Bottom Reversal Pattern

Just as the double top pattern, with this being the opposing direction.

The double bottom reversal pattern is one of the reversal price patterns I use very often to capture strong moves in the market.

It’s a powerful reversal pattern used at the end of a down trending market. The pattern is a very popular price pattern with traders alike.

The double bottom price pattern will form at the bottom of an down trending market.

This is very important to remember and never look to trade this pattern unless it is at the bottom of the trend.

The pattern will signal normally to traders, the potential trend is coming to an end with a reversal to the bullish side highly imminent. 

How does this pattern form?

Important to remember

The double bottom forms after a retrace within a down trend. This finds sellers creating a resistance bounce (called the baseline).

Many traders will be selling the market with the assumption of the continuation of the trend.

Most likely using one of the bearish continuation price patterns that you can find on another one of my trading lessons here.

As price finds the previous low made, the buyers (often referred to as demand) reverse the market back up once again.

Creating the second bounce of the previous support therefore creating the double bottom formation. 

As on the image below, you can see how this formation of the double bottom price reversal would look.

The red line would represent the baseline which is classed as the entry point with a double bottom pattern.

Always remember you can not confirm the double bottom until price does break and close the baseline level.

double bottom reversal
Double Bottom

Double bottom entry criteria

With most reversal price patterns, the entry has two potential possibilities that could be applied. The typical entries that could be used with this formation-

  • Breakout of the baseline (red dashed line) with a stop placed below the double bottom. (this being a more aggressive approach)
  • As on the image above, wait for a breakout and retest to catch a entry. (being a more conservative approach)

As like the double top formation the potential targets with this reversal pattern.

You would look to target the distance from the double bottom to the baseline, and project this again from the baseline for the target. (called a measured objective)

Check out what a double bottom reversal looks like on a real price chart…

Double Bottom Reversal

The Head and Shoulders Formation

Why the head and shoulders formation is a popular reversal price pattern?

With it being one of the powerful reversal price patterns the head and shoulders formation. Is a pattern that is only ever used at the end of an up trending market. 

The head and shoulders price pattern will form at the top of an up trending market. Similar to the double top formation would form.

This pattern will signal to traders, the current trend is coming to an end with a reversal highly imminent. 

How does this pattern form?

The head and shoulders price pattern is one of the more technical reversal price patterns you can trade.

The formation consists of four sections within the pattern. 

These are-

  • Left Shoulder 
  • Head
  • Right Shoulder 
  • Neckline

The left shoulder and the head, are the makeup of the current up trend. With the right shoulder being the last part of the reversal pattern with a potential entry.

The neckline is then created just as a double top creates the baseline. Just with the pattern having a second test of the neckline before breaking.

The two shoulders would tend to find the same resistance level or area where sellers (or more commonly know as supply) reverses the market.

As on the image below, you can see how this formation of the head and shoulder technical price reversal would look.

The blue line would represent the neckline which is classed as the entry point with a head and shoulders top pattern.

Important to remember

Always remember to wait for the break and close of the neckline before confirming this as a valid head and shoulders pattern.

head and shoulder top reversal pattern
Head and Shoulder Top Reversal Pattern

The typical entries that could be used with this reversal price pattern formation-

  • Breakout of the neckline (blue line) with a stop placed above the right shoulder top. (this being a more aggressive approach)
  • As on the image above, wait for a breakout and retest to catch a entry, with the stop placed above the neckline. (being a more conservative approach or a second chance entry)

When looking for targets with the head and shoulders reversal price pattern.

You are going to use the distance from the head to the neckline, and then project this from the neckline lower for a target. (known as a measured objective)

Check out what a head and shoulders reversal looks like on a real price chart…

Head and shoulders
Head & Shoulders

The Inverse Head and Shoulders Formation

A powerful reversal pattern after a down trend

This being one of the more powerful reversal price patterns after a down trend is the inverse head and shoulders formation.

This pattern is only ever used at the end of an down trending market. 

The inverse head and shoulders price pattern will form at the bottom of an down trending market as price finds a base.

When trading this pattern it will signal to you, the current trend is coming to an end with a reversal highly imminent. 

How does this pattern form?

The inverse head and shoulders price pattern is one of the more technical reversal price patterns you can trade.

The formation consists of four sections within the pattern. 

These are-

  • Left Shoulder 
  • Head
  • Right Shoulder 
  • Neckline

The left shoulder and the head, are the makeup of the current down trend. With the right shoulder being the last part of the reversal pattern with a potential entry.

The neckline is then created just as a double bottom creates the baseline. Just with the pattern having a second test of the neckline before breaking.

The two shoulders would tend to find the same support level or area where buyers (or more commonly know as demand) will reverse the market.

As on the image below, you can see how this formation of the inverse head and shoulder price reversal would look like.

The red line would represent the neckline which is classed as the entry point with a inverse head and shoulders pattern.

As usual it is important to remember just as all of the other reversal patterns the inverse head and shoulders is not confirmed until a break and close of the neckline.

head and shoulders bottom
Inverse Head and Shoulder Reversal Pattern

Entry criteria 

 The typical entries that could be used with this formation-

  • Breakout of the neckline (red line) with a stop placed below the right shoulder bottom. (this being a more aggressive approach)
  • As on the image above, wait for a breakout and retest to catch a entry, with the stop placed below the neckline. (being a more conservative approach or a second chance entry)

Targets with this reversal pattern, are set by the distance from the head to the neckline, and then projected from the neckline higher for a target. (known as a measured objective)

Check out what a inverse head and shoulders reversal looks like on a real price chart…

inverse head and shoulders
Inverse Head & Shoulders

Final thoughts on the reversal price patterns

Now I have gone through all the reversal plays you can use with your trading today, to become a more profitable long term trader.

Always remember you need to confirm a technical pattern such as these reversal plays with the break and close of the baseline or neckline.

Before you attempt to trade any setups, this way you will not be caught in the market with false breaks.

If you have any questions or comments you may have with this basic training of reversal patterns just leave a comment below in the comments form.

Let me know if you decide to trade any of these patterns or perhaps you already do and are profitable with them.

It would be great if you can share your experiences with trading reversal plays with other new traders.

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