Training Video_8

 

Trend Reversal patterns

 

Technical Analysis training course learning video part8 about price trend reversal patterns. Bottom reversal patterns and top reversal patterns with the head and shoulders, complex head and shoulders, triple and double tops and bottoms, rounding bottoms and V-formations.

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Hi Sylvain Vervoort here with technical analysis part 8. We will now discuss a few of the more important price top and bottom reversal patterns. If you like this video, pay a visit to my website at stocata dot org.  The final purpose of this video series is to teach you how to trade successfully applying technical analysis techniques.

The head and shoulders formation belongs with an accuracy of about 90% to the most reliable reversal patterns. The price moves in an uptrend. Only after the pattern has formed, you will recognize A as the left shoulder. The price drops back to the support B of the up-going trend line. From here, the price makes a last move up to C often with lower volume compared to the A move. This will be the head of the pattern. The turning point at B will be part of the neck line. Next the price drops through the up-going trend line and falls back to the level of the neck line D. After that, the price will move up again to E to form the right shoulder. From here the price will drop below the neck line making lower lows. The shoulders (A-E) and the neck line (B-D) in the head and shoulders formation should be at about the same price level and at about the same distance in time from the head. The head and shoulders pattern is confirmed when the price falls below an up-trending neck line or after the right shoulder in case of a down-trending neck line. In approximately half of the cases, there is a bounce back up to the neck line G, or even up to between the neck line and the right shoulder.

This chart shows you a real head and shoulders top reversal formation. With the head and shoulders formation you can basically also calculate a price target. You measure the distance from the top of the head till the lowest point of the neck line and project this distance downwards. This will give you a theoretical price target. Here the pattern is confirmed when the price falls below the up-trending neck line. 

Mirroring the head and shoulders top reversal pattern gives a head and shoulders bottom reversal pattern. Shoulder bottoms should be at around the same price level and at about the same distance from the head. The head and shoulders bottom reversal pattern here with an ascending neck line is confirmed when price turns up after the right shoulder.

A complex head and shoulders top reversal pattern will have more shoulders or more heads, but rarely both. The shoulder tops are around the same price level and at approximately the same distance from the head. The complex head and shoulders pattern is confirmed when the price falls below an up-trending neck line or as in this chart; after the internal right shoulder in the case of a down-trending neck line. Mirroring the complex head and shoulders top reversal pattern gives you a head and shoulders bottom reversal pattern.

Triple tops and bottoms are a variation on the head and shoulders theme. The difference is that tops or bottoms are at approximately the same level. Triple tops and bottoms offer a reliable pattern with an accuracy of about 80%. A triple top is confirmed when the price falls below the lowest valley, as shown in this chart. 

 

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A triple bottom formation is confirmed when the price rises above the highest top of the pattern, as in this example chart.

A double top reversal pattern is formed with a large demand during the formation of the first top and a lack of demand with the second top. With daily price bars, tops are separated by about two up to eight weeks and should only have a small difference in price level. The in between reaction should have a price drop of about 10% on average. With an accuracy of 80%, this pattern is very reliable. The pattern is confirmed when the price falls below the level of the middle reaction.  

For a double bottom, the reasoning is analogue to that of a double top. The trend is down, and a double bottom pattern is formed as an indication that the trend will probably reverse. With daily price bars, bottoms are separated by about two up to eight weeks and should only have a small difference in price level. The in between reaction should have an average price rise of about 10%. With 80% reversals, this pattern is very reliable. The pattern is confirmed when the price rises above the level of the middle reaction.

A rounding bottom pattern appears on daily and weekly bar charts. This pattern takes time to complete. The price can peak halfway through the pattern, but usually it retraces most of it quickly. Rounding bottoms are becoming rare because of today’s high volatility of the markets as a result of the information society. Rounding bottoms lead to a price reversal 90% of the time. The pattern confirms when the price closes above the highest peak of the pattern. There may be a saucer lip when the price drops temporarily before continuing the uptrend.

A V-formation bottom reversal creates a V-character; a top reversal creates an inverted V-character. The price at the start of the V-formation will form a one-day reversal, an island reversal, or a spark. A V-formation start can be recognized most of the time when it breaks the last possible steep trend line, together with a candle stick reversal pattern and a one-day island or spark reversal. A one-day top reversal shown in this chart arises if the price makes on the same day a new high, reverses and closes below the closing price of the previous day. A one-day top reversal in a candle chart is a black candle and often is part of a candlestick pattern.

An island reversal occurs when a number of price bars are isolated by a window at the beginning and end of the island pattern. The island is confirmed if the second window is formed. The windows should be more or less at the same price level.

The bottom V-formation spark reversal pattern shown in this chart arises if the price makes on the same day a very big positive move compared to the previous bars. In a candlestick chart this will be a big white candle at a bottom and a big black candle at a top. The big candle itself is the buying signal at a bottom and the selling confirmation at a top.

I have shown you those that I consider the most important price reversal patterns used in technical analysis. The following video we will have a look at price continuation patterns and patterns that either can be a reversal or a continuation pattern.  These patterns will certainly help you with your trading based on technical analysis. Watch out for this next video. Stay in touch, subscribe to my channel, tell your friends and pay a visit to my website: stocata dot org. Have a nice day and I see you soon again.

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