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A reversal chart pattern is a pattern that signals a possible change in trend.
Unlike a continuation pattern, it doesn't signal a resumption of the current move, but a possible reversal.
In technical analysis, you mainly use it to spot where a trend might end and wait for confirmation before considering an entry.
How do you confirm a reversal pattern?
A reversal pattern appears after an established uptrend or downtrend.
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It is confirmed and becomes tradable once price has crossed a particular level.
In practice, that can mean:
- A break of the neckline
- A break below support
- A break above resistance
- A break through a trendline
How do you use a reversal chart pattern?
The simplest approach is to:
- Identify a trend
- Spot a pattern
- Wait for the confirming breakout
- Define an entry point, an invalidation level and a price target
The theoretical target is usually calculated from the height of the pattern.
The main reversal chart patterns
Here are the main reversal patterns, the scenarios they can signal and the levels to wait for to confirm them.
| Reversal pattern | Potential signal | Confirmation to wait for |
|---|---|---|
| Double top | Bearish reversal | Break of the neckline |
| Double bottom | Bullish reversal | Break of the neckline |
| Triple top | Bearish reversal | Break of the neckline |
| Triple bottom | Bullish reversal | Break of the neckline |
| Head and shoulders | Bearish reversal | Break of the neckline |
| Inverse head and shoulders | Bullish reversal | Break of the neckline |
| Rising wedge | Possible bearish reversal | Break below support |
| Falling wedge | Possible bullish reversal | Break above resistance |
| Ascending broadening wedge | Possible bearish reversal | Break below support |
| Descending broadening wedge | Possible bullish reversal | Break above resistance |
| Diamond top | Bearish reversal | Break below the lower boundary |
| Diamond bottom | Bullish reversal | Break above the upper boundary |
| Rounding top | Bearish reversal | Break of the neckline |
| Rounding bottom | Bullish reversal | Break of the neckline |
| V top | Possible bearish reversal | Break of the key level |
| V bottom | Possible bullish reversal | Break of the key level |
| Bump and Run | Possible reversal, depending on the context | Break of the key level |
