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Head and Shoulders
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2
Double Top and Double Bottom
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3
Rounding Top and Rounding Bottom
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4
Cup and Handle
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5
Reversal Candlestick Patterns
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6
Here’s what else to consider
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Reversal patterns are chart formations that indicate a change in the direction of the price trend. They can signal the end of an uptrend or a downtrend, and the start of a new move in the opposite direction. Reversal patterns can be very profitable to trade, as they offer opportunities to enter or exit the market at the right time. However, not all reversal patterns are equally reliable or effective. In this article, we will explore some of the most profitable reversal patterns to trade, and how to identify and use them in your technical analysis.
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1 Head and Shoulders
One of the most well-known and widely used reversal patterns is the head and shoulders. It consists of three peaks, with the middle one (the head) being higher than the other two (the shoulders). The pattern is completed when the price breaks below the neckline, which is a horizontal line that connects the lows of the two shoulders. The head and shoulders indicates a reversal from an uptrend to a downtrend, and the potential target of the move can be calculated by subtracting the height of the head from the neckline. To trade the head and shoulders, you can look for a short entry when the price breaks below the neckline, and place a stop-loss above the right shoulder.
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2 Double Top and Double Bottom
Another common reversal pattern is the double top and double bottom. As the name suggests, it consists of two peaks or two troughs that are roughly equal in height or depth. The pattern is completed when the price breaks below the support level (for a double top) or above the resistance level (for a double bottom) that separates the two peaks or troughs. The double top and double bottom indicate a reversal from an uptrend to a downtrend, or from a downtrend to an uptrend, respectively. The potential target of the move can be calculated by adding or subtracting the distance between the support or resistance level and the peaks or troughs. To trade the double top and bottom, you can look for a short entry when the price breaks below the support level (for a double top), or a long entry when the price breaks above the resistance level (for a double bottom), and place a stop-loss above or below the peaks or troughs.
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3 Rounding Top and Rounding Bottom
A less common but still profitable reversal pattern is the rounding top and rounding bottom. It consists of a gradual and smooth curve that forms at the end of an uptrend or a downtrend. The pattern is completed when the price breaks below the support level (for a rounding top) or above the resistance level (for a rounding bottom) that defines the base of the curve. The rounding top and bottom indicate a reversal from an uptrend to a downtrend, or from a downtrend to an uptrend, respectively. The potential target of the move can be calculated by adding or subtracting the height of the curve from the support or resistance level. To trade the rounding top and bottom, you can look for a short entry when the price breaks below the support level (for a rounding top), or a long entry when the price breaks above the resistance level (for a rounding bottom), and place a stop-loss above or below the curve.
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4 Cup and Handle
A variation of the rounding bottom is the cup and handle. It consists of a U-shaped curve that forms at the end of a downtrend, followed by a smaller downward-sloping curve that forms on the right side of the U-shape. The pattern is completed when the price breaks above the resistance level that defines the rim of the cup. The cup and handle indicates a reversal from a downtrend to an uptrend, and the potential target of the move can be calculated by adding the height of the cup to the resistance level. To trade the cup and handle, you can look for a long entry when the price breaks above the resistance level, and place a stop-loss below the handle.
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5 Reversal Candlestick Patterns
In addition to chart patterns, reversal candlestick patterns can also help you identify and trade potential price reversals. These formations reflect the shift in the balance of power between buyers and sellers. The most profitable patterns include the Hammer and Inverted Hammer, Shooting Star and Hanging Man, Bullish and Bearish Engulfing, and Morning Star and Evening Star. To trade these patterns, wait for confirmation of the pattern by the closing of the last candle, then enter in the direction of the reversal and place a stop-loss beyond the opposite end of the pattern. Reversal candlestick patterns offer an opportunity to benefit from market reversals and enhance your trading performance.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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