Reversal patterns belong to the group of chart patterns used in technical analysis to indicate that the prevailing trend is ending and a fresh trend is beginning in the opposite direction. At a market top, a reversal chart pattern points to a potential shift from an uptrend to a downtrend. At a market bottom, it points to a potential shift from a downtrend to an uptrend.
A trade based on a trend reversal pattern involves 3 steps: 1) wait until a candle closes beyond the reversal chart pattern’s neckline, 2) take a position when that breakout candle closes or when price retests the broken neckline, and 3) set a stop-loss beyond the pattern’s opposite extreme, projecting the price target from the breakout.
What Do Reversal Chart Patterns Indicate?
A reversal chart pattern develops when the prevailing trend weakens and a trend in the opposite direction begins to emerge on the chart. Unlike a candlestick reversal pattern, which comprises one to three candles, a reversal chart pattern spans several price swings. On a daily chart, its formation often takes weeks or months.
When reversal chart patterns appear at market tops, they are classified as bearish reversal patterns, signalling a transition from an uptrend to a downtrend. When they appear at market bottoms, they are classified as bullish reversal patterns, signalling a transition from a downtrend to an uptrend.
At a market top, a reversal chart pattern is also termed a distribution pattern: traders show greater eagerness to sell the asset than to buy it. At a market bottom, the corresponding term is an accumulation pattern, reflecting more active buying than selling.
What Drives Reversal Chart Patterns?
The balance between buyers and sellers, as reflected in price action, explains how reversal chart patterns develop. At a market top, buyers take price to a peak but cannot move it higher on their next attempt, indicating that buying pressure is weakening. At a market bottom, sellers take price to a trough but cannot move it lower on their next attempt, indicating that selling pressure is easing.
A new trend can emerge as control passes from the side driving the prevailing trend to the opposing side. Most reversal chart patterns comprise 5 parts: 1) an existing trend, 2) peaks or troughs, 3) a neckline or trendline, 4) a breakout, and 5) volume.
| Component | What it represents | Why it is important |
|---|---|---|
| 1) Existing trend | The preceding uptrend or downtrend from which the reversal chart pattern develops | An established trend must be present for the chart pattern to reverse it |
| 2) Peaks or troughs | Two or more unsuccessful attempts to move price beyond the same area | Each unsuccessful attempt indicates weakening strength on the side driving the prevailing trend |
| 3) Neckline or trendline | A line joining the troughs in a bearish pattern or the peaks in a bullish pattern; a wedge has both an upper and a lower trendline | Confirmation requires the breakout candle to close beyond this neckline or trendline |
| 4) Breakout | The close of a candle beyond the neckline or trendline | Completion of the reversal chart pattern occurs at the breakout |
| 5) Volume | The trade count for each candle (tick volume for spot forex) | An increase in volume on the breakout candle lends support to the new trend |
| Key Point: Before trading a reversal chart pattern, always establish that a trend precedes it. A double top appearing within a sideways range, without a preceding uptrend, carries a much greater likelihood of failure. |
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Which Reversal Chart Patterns Are Most Common?
The reversal chart patterns most commonly encountered fall into these groups: 1) head and shoulders and inverse head and shoulders, 2) double top and double bottom, 3) triple top and triple bottom, 4) rising wedge and falling wedge, 5) rounding top and rounding bottom, and 6) V-shaped top and V-shaped bottom. All 12 reversal chart patterns covered in this guide appear in the table below, alongside their signals, confirmation requirements and invalidating price action.
| Reversal chart formation | Directional signal | Preceding trend | Confirmation requirement | Invalidating move |
|---|---|---|---|---|
| Head and shoulders | Bearish | Uptrend | A close below the neckline by a candle | A right shoulder that moves above the head |
| Inverse head and shoulders | Bullish | Downtrend | A close above the neckline by a candle | A right shoulder that drops below the head |
| Double top | Bearish | Uptrend | A candle close beneath the neckline drawn through the trough | A second peak closing distinctly above the first |
| Double bottom | Bullish | Downtrend | A candle close above the neckline drawn through the peak | A second trough closing distinctly below the first |
| Triple top | Bearish | Uptrend | A candle close beneath the neckline joining the troughs | A candle closing distinctly above all three peaks |
| Triple bottom | Bullish | Downtrend | A candle close above the neckline joining the peaks | A candle closing distinctly below all three troughs |
| Rising wedge | Bearish | Uptrend | A close beneath the lower trendline by a candle | A close above the upper trendline by a candle |
| Falling wedge | Bullish | Downtrend | A close above the upper trendline by a candle | A close beneath the lower trendline by a candle |
| Rounding top | Bearish | Uptrend | A candle close beneath the neckline along the curve’s base | A fresh price high above the curve |
| Rounding bottom | Bullish | Downtrend | A candle close above the neckline along the curve’s top | A fresh price low below the curve |
| V-shaped top | Bearish | Strong uptrend | An abrupt decline immediately following the peak; there is no neckline | A return in price above the peak |
| V-shaped bottom | Bullish | Strong downtrend | An abrupt advance immediately following the trough; there is no neckline | A return in price below the trough |
How Do Head and Shoulders and Inverse Head and Shoulders Patterns Form?
The head and shoulders pattern signals a bearish reversal through three peaks following an uptrend: 1) the left shoulder, 2) a taller peak known as the head, and 3) the right shoulder, broadly level with the left shoulder. Joining the two troughs separating these three peaks creates the neckline. A candle close below that line completes the head and shoulders pattern.
The inverse head and shoulders (also known as the inverted head and shoulders) appears at the end of a downtrend as the bullish mirror image of the head and shoulders pattern. Its three troughs place the head below both shoulders. Completion requires a candle to close above the neckline connecting the two peaks between those troughs. In technical analysis, both the head and shoulders and its inverse are among the reversal chart patterns followed most widely.
How Do Double Top and Double Bottom Patterns Signal Reversals?
The double top pattern indicates a bearish reversal through two peaks near the same resistance level, separated by a single trough, creating an M-shape. That trough defines the neckline. After buyers make two unsuccessful attempts to drive price higher, a candle close below the neckline completes the double top.
The double bottom pattern mirrors the double top in a bullish formation: two troughs near the same support level surround a single peak, creating a W-shape. Following two unsuccessful attempts by sellers to drive price lower, a candle close above the neckline drawn through the peak completes the double bottom.
Prices at the two peaks of a double top, or at the two troughs of a double bottom, should be almost identical. If the second peak closes distinctly above the first, it is more likely to belong to the continuing uptrend than to a double top.
What Distinguishes Triple Top and Triple Bottom Patterns?
The triple top pattern indicates a bearish reversal when, after an uptrend, price unsuccessfully tests the same resistance level on three occasions. The triple bottom pattern provides the bullish counterpart, forming three troughs near the same support level following a downtrend.
Compared with double tops and double bottoms, triple tops and triple bottoms occur less frequently. A third unsuccessful test of the level often adds weight to the formation. For neckline placement, confirmation and price targets, triple tops and triple bottoms follow the same rules as their double top and double bottom counterparts.
When Do Rising Wedge and Falling Wedge Patterns Reverse a Trend?
The rising wedge pattern indicates a bearish reversal and comprises two converging trendlines sloping upwards, with the lower line climbing more steeply than the upper one. Following an uptrend, this formation reflects weakening buying pressure. Its completion requires a candle close below the lower trendline.
The falling wedge pattern provides the bullish counterpart. Both converging trendlines slope downwards, but the upper line declines more steeply than the lower one. Following a downtrend, this formation reflects easing selling pressure and completes with a candle close above the upper trendline.
Whether a wedge signals reversal or continuation depends on the trend in which it develops. Within a downtrend, a rising wedge indicates bearish continuation; within an uptrend, a falling wedge indicates bullish continuation.
What Do Rounding Top and Rounding Bottom Patterns Show?
The rounding bottom pattern, also known as a saucer, signals a bullish reversal through a smooth, curved arc at the end of a downtrend. Selling pressure gradually subsides as buying pressure gradually strengthens within the formation. A candle close above the neckline at the curve’s top completes the rounding bottom.
The rounding top pattern mirrors the rounding bottom in bearish form at the end of an uptrend. Buying pressure gradually diminishes, with completion occurring when a candle closes below the neckline at the curve’s base. Of all reversal chart patterns, rounding tops and rounding bottoms take the longest to develop and are more readily visible on weekly and monthly charts.
Why Are V-Shaped Top and Bottom Reversal Patterns Different?
The V-shaped bottom, also termed a spike bottom, indicates a bullish reversal: price drops sharply to a trough before immediately rebounding sharply, without consolidating between the two moves. The V-shaped top provides the bearish counterpart, as a sharp climb to a peak gives way immediately to a sharp decline.
An abrupt shift in market sentiment drives V-shaped tops and V-shaped bottoms. Neither formation offers a neckline for traders to await. As a result, trading a V-shaped reversal in real time is difficult, although identifying it after the event is easier.
What Are the Steps for Trading Reversal Chart Patterns?
A reversal-pattern trade follows 4 steps: 1) verify the breakout, 2) select an entry strategy, 3) position the stop-loss, and 4) establish the price target. By drawing on the pattern’s components at every step, traders can define the complete trade plan before taking a position.
What Confirms a Reversal Pattern Breakout?
Confirmation of a reversal chart pattern requires a candle close beyond the neckline (or beyond a wedge’s trendline) on the timeframe being traded. Merely moving through the neckline is insufficient if the candle then closes back within the formation. Entering on such a candle often results in a fakeout, otherwise called a fake breakout.
An increase in volume on the breakout candle indicates broader trader participation in the new trend. Alignment with the trend on a higher timeframe is another check used by many traders. For additional confirmation, some also seek RSI, MACD or a candlestick reversal pattern at the neckline.
Because spot forex does not have a central exchange, MT4 and MT5 display tick volume: a count of price changes within each candle rather than of contracts traded. The broker’s server time determines which daily candle close provides breakout confirmation.
| Practical Tip: Before opening a position on MT4 or MT5, check for increased tick volume on the breakout candle. Also wait until that candle closes beyond the neckline on the timeframe you are trading. |
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Where Can Traders Enter a Reversal Pattern Trade?
For reversal chart patterns, traders primarily choose between 2 entry strategies: 1) opening a position as the breakout candle closes beyond the neckline, and 2) opening a position when price makes a retest of the broken neckline, projecting the price target from the breakout.
Entering on the breakout provides earlier exposure to the new trend, although the entry is further away from the stop-loss. Once broken, the neckline often becomes resistance following a bearish breakout or support following a bullish breakout. The retest approach waits for price to revisit that neckline, seeking a better entry price.
Waiting for a retest means missing some trades, since price does not invariably revisit the broken neckline. During news releases and weekend gaps, a buy stop or sell stop placed just beyond the neckline may also execute at a price worse than the order price, owing to slippage and increased spreads.
Where Should a Reversal Pattern Stop-Loss Be Set?
The stop-loss belongs just beyond the reversal chart pattern’s opposite extreme. This means above the highest peak for a bearish reversal, or below the lowest trough for a bullish reversal. In a head and shoulders trade, it is placed above the head; in an inverse head and shoulders trade, it is placed below the head.
Placing the stop-loss beyond the opposite extreme provides a safer stop, as price must pass the entire formation before the position is stopped out. The greater distance between entry and this safer stop requires a smaller position size if risk per trade is to remain unchanged.
How Is a Reversal Pattern Price Target Calculated?
The price target is calculated using the formation’s maximum height: the vertical distance between the neckline and the most extreme peak or trough. Projecting that distance from the breakout point, in the breakout’s direction, gives the target. The formula for each direction is as follows:
- Bearish target price = neckline − formation’s maximum height
- Bullish target price = neckline + formation’s maximum height
In a head and shoulders formation, measure the maximum height from the head’s highest point to the neckline. This target estimates the potential extent of the new trend, rather than fixing its endpoint: price may fall short of the target or move well beyond it.
How Does a Reversal Chart Pattern Trade Work on EUR/USD?
An inverse head and shoulders on the EUR/USD daily chart provides the illustrated example below, applying numbers to each of the 4 trading steps. The EUR/USD prices are illustrative and are not a trade recommendation.
Following a downtrend, the EUR/USD formation places its left shoulder at 1.0750, head at 1.0620 and right shoulder at 1.0740. Both intervening peaks stand at 1.0880. Breakout confirmation follows when a daily candle closes at 1.0900, above the horizontal neckline at 1.0880.
| Trading level | Price level | Basis for the level |
|---|---|---|
| Neckline | 1.0880 | Horizontal line joining the two peaks that separate the troughs |
| Formation’s maximum height | 260 pips | 1.0880 − 1.0620 (head) |
| Target price | 1.1140 | 1.0880 + 260 pips |
| Stop-loss level | 1.0605 | Below the head by 15 pips |
| Entry on breakout | 1.0900 | The breakout candle’s closing price |
| Entry on retest | 1.0885 | A return to test the broken neckline |
Using the same EUR/USD inverse head and shoulders, the table below contrasts the 2 entry strategies. It assumes a $10,000 account, risk of 1% ($100) on each trade and a $10 pip value per standard lot.
| Entry approach | Distance at risk to stop-loss | Potential reward to target | Risk-to-reward ratio | Trade size |
|---|---|---|---|---|
| 1) Entry on breakout at 1.0900 | 295 pips | 240 pips | Approximately 1:0.8 | 0.03 lots (risk of $88.50) |
| 2) Entry on retest at 1.0885 | 280 pips | 255 pips | Approximately 1:0.9 |
A stop-loss beneath the head leaves both strategies risking more pips than they stand to gain at the price target, resulting in a risk-reward ratio below 1:1. Entering on the retest improves that ratio from about 1:0.8 to about 1:0.9. However, this approach misses the trade if EUR/USD does not revisit the neckline.
Rounding the calculated position of 0.034 lots down to 0.03 lots keeps the stop-loss loss within the $100 risk limit. For this EUR/USD inverse head and shoulders, reward exceeds risk only if price advances beyond the target. Traders placing the stop-loss below the head therefore determine their exit before opening the position.
Before committing real money, you can practise both approaches through a TMGM demo account on MT4 or MT5. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
How Do Reversal Patterns Differ From Continuation Patterns?
A reversal pattern indicates that the prevailing trend is ending. By contrast, a continuation pattern indicates a temporary pause, after which that trend resumes in its original direction.
| Characteristic | Reversal formations | Continuation formations |
|---|---|---|
| Signal conveyed | An end to the prevailing trend and the beginning of a trend in the opposite direction | A temporary interruption before the prevailing trend resumes |
| Location of formation | At the top or bottom of a market | During the course of an uptrend or downtrend |
| Direction of breakout | Opposite to the prevailing trend | In line with the prevailing trend |
| Typical examples | Head and shoulders, double top, double bottom, triple top and rounding bottom | Rectangle, triangle, pennant, flag and cup and handle |
| Wedge formations | Rising wedge following an uptrend; falling wedge following a downtrend | Rising wedge within a downtrend; falling wedge within an uptrend |
Those anticipating the end of a trend seek reversal patterns. Those looking to join a trend after it has already begun seek continuation patterns instead. Confirmation is identical for both types: a candle must close beyond the line defining the pattern’s boundary.
Which Mistakes Commonly Affect Reversal Pattern Trades?
Premature entries and the absence of a trading plan account for the common errors in reversal-pattern trading. The following 6 mistakes occur frequently:
- Taking a position before breakout confirmation. Selling at the second peak of a potential double top, without a candle close below the neckline, means trading a formation that might never complete. Awaiting a close beyond the neckline reduces the likelihood of entering a fakeout.
- Overlooking the trend on a higher timeframe. Within a strong daily-chart uptrend, a bearish reversal formation on the 1-hour chart is more prone to failure. Reviewing the higher-timeframe trend before entry establishes whether the broader trend supports the reversal.
- Confusing a pullback with a double top. During a strong uptrend, a pullback may resemble the initial peak and trough of a double top. Unless a candle closes below the neckline, it is more likely to remain part of the prevailing uptrend.
- Setting the stop-loss too near the entry price. An ordinary neckline retest can trigger a stop-loss placed within the formation before price heads towards the target. Before selecting a safer stop-loss and reducing position size, traders use the Average True Range (ATR) indicator to gauge the normal price movement within a single candle.
- Failing to plan the entry and price target. Without selecting either a breakout or retest entry, or calculating a target, traders often remain in positions with no exit plan. A trading plan specifies the entry approach, stop-loss, target and position size before any position is opened.
- Using small reversal formations on 1-minute and 5-minute charts. Although reversal chart patterns develop rapidly on 1-minute and 5-minute charts, they are less dependable than those on 4-hour, daily or weekly charts.
Reversal Chart Patterns: Frequently Asked Questions
Which Forex Reversal Pattern Is Best?
In forex, the head and shoulders, double top and double bottom rank among the most widely used reversal patterns. For an individual trader, the best choice is the formation they can identify consistently and trade with a defined entry, stop-loss and price target.
Which Timeframe Suits Reversal Chart Patterns Best?
From 1-minute through to monthly charts, reversal chart patterns occur across all timeframes. Their mechanics are the same on forex, stock, index and commodity charts. Daily or weekly formations develop over weeks or months and generally indicate a larger trend shift than an equivalent formation on a 5-minute chart. Many traders therefore apply multi-timeframe analysis, identifying the formation on one timeframe while reviewing the trend on a higher one.
What Can Indicate an Approaching Trend Reversal?
Before a trend reverses, a formation such as a head and shoulders, double top, double bottom, rising wedge or falling wedge often appears. Repeated inability to move price beyond the same level offers an early warning. Confirmation, however, comes only with a candle close beyond the reversal chart pattern’s neckline.
Which Other Neutral Chart Patterns Can You Explore?
| Neutral Formation | Key Characteristics |
|---|---|
| Understanding the Symmetrical Triangle Pattern | A breakout in either direction is possible from the symmetrical triangle, a continuation formation. 1. At least two lower highs are joined by an upper trendline sloping downwards. 2. At least two higher lows are joined by a lower trendline sloping upwards. 3. The prevailing trend usually determines the breakout direction. |
| Understanding the Rectangle Pattern | Sideways price movement between two horizontal levels creates the rectangle continuation pattern. 1. At least two comparable highs are joined by a horizontal resistance line. 2. At least two comparable lows are joined by a horizontal support line. 3. The prevailing trend usually determines the breakout direction. |
| Understanding the Pennant Pattern | Either bullish or bearish continuation can be signalled by a pennant. 1. The flagpole is created by a sharp move in price. 2. A small triangle, known as the pennant, then develops between converging trendlines. 3. The flagpole’s direction usually determines the breakout direction. |
| Understanding the Butterfly Pattern | Bullish and bearish versions of the butterfly harmonic pattern are possible. 1. Five price points develop, designated X, A, B, C and D. 2. A retracement of 78.6% of the XA swing locates point B. 3. Beyond point X, point D lies at the XA swing’s 127% to 161.8% Fibonacci extension. 4. At point D, traders seek to buy a bullish butterfly or sell a bearish butterfly. |
Which Other Trading Pattern Guides Can You Read?
| Guide Topic | Scope of the Guide |
|---|---|
| Understanding Reversal Candlestick Patterns | Learn how candlestick formations can warn of a potential reversal in an uptrend or downtrend. 1. A downtrend precedes the formation of bullish reversal patterns. 2. An uptrend precedes the formation of bearish reversal patterns. 3. Before opening a position, traders await a candle that confirms the signal. |
| Understanding Chart Patterns in Trading | Learn how swings in price across many candles create chart patterns. 1. A possible end to the prevailing trend is flagged by reversal chart patterns. 2. A pause ahead of the prevailing trend’s resumption is indicated by continuation chart patterns. 3. A candle close beyond the trendline defining the chart pattern’s boundary provides the entry point for traders. |
Which Other Bearish Chart Patterns Can You Explore?
| Bearish Formation | Key Characteristics |
|---|---|
| Understanding the Double Top Pattern | Following an uptrend, a double top develops as a bearish reversal formation. 1. Two highs develop at broadly the same price level. 2. The neckline is defined by the swing low separating those highs. 3. Confirmation of the breakout requires a candle close beneath the neckline. |
| Understanding the Triple Top Pattern | Following an uptrend, a triple top develops as a bearish reversal formation. 1. Three highs develop at broadly the same price level. 2. The neckline is defined by the swing lows separating those highs. 3. Confirmation of the breakout requires a candle close beneath the neckline. |
| Understanding the Head and Shoulders Pattern | Following an uptrend, a head and shoulders develops as a bearish reversal formation. 1. Of the three price highs, the central one (the head) stands highest. 2. The outer pair of highs (the shoulders) are broadly level. 3. A candle close beneath the neckline confirms the breakout; this line joins the lows separating the three highs. |
| Understanding the Rising Wedge Pattern | A rising wedge signals bearish reversal when it follows an uptrend, or bearish continuation when it occurs within a downtrend. 1. As price records higher highs and higher lows, two rising trendlines converge. 2. The upper trendline (resistance) rises less steeply than the lower trendline (support). 3. Confirmation of the breakout requires a candle close beneath the lower trendline. |
| Understanding the Descending Triangle Pattern | Usually developing within a downtrend, the descending triangle is a bearish continuation formation. 1. At least two comparable lows are joined by a horizontal lower trendline (support). 2. At least two lower highs are joined by a falling upper trendline. 3. Confirmation of the breakout requires a candle close beneath support. |
| Understanding the Bear Flag Pattern | Within a strong downtrend, the bear flag develops as a bearish continuation formation. 1. The flagpole is created by a steep price decline. 2. A small upward-sloping or sideways channel then contains price movement, forming the flag. 3. Confirmation of the breakout requires a candle close beneath the flag’s lower boundary. |
Which Other Bullish Chart Patterns Can You Explore?
| Bullish Formation | Key Characteristics |
|---|---|
| Understanding the Double Bottom Pattern | Following a downtrend, a double bottom develops as a bullish reversal formation. 1. Two lows develop at broadly the same price level. 2. The neckline is defined by the swing high separating those lows. 3. Confirmation of the breakout requires a candle close above the neckline. |
| Understanding the Triple Bottom Pattern | Following a downtrend, a triple bottom develops as a bullish reversal formation. 1. Three lows develop at broadly the same price level. 2. The neckline is defined by the swing highs separating those lows. 3. Confirmation of the breakout requires a candle close above the neckline. |
| Understanding the Inverse Head and Shoulders Pattern | Following a downtrend, an inverse head and shoulders develops as a bullish reversal formation. 1. Of the three price lows, the central one (the head) lies lowest. 2. The outer pair of lows (the shoulders) are broadly level. 3. A candle close above the neckline confirms the breakout; this line joins the highs separating the three lows. |
| Understanding the Falling Wedge Pattern | A falling wedge signals bullish reversal when it follows a downtrend, or bullish continuation when it occurs within an uptrend. 1. As price records lower highs and lower lows, two falling trendlines converge. 2. The lower trendline (support) falls less steeply than the upper trendline (resistance). 3. Confirmation of the breakout requires a candle close above the upper trendline. |
| Understanding the Ascending Triangle Pattern | Usually developing within an uptrend, the ascending triangle is a bullish continuation formation. 1. At least two comparable highs are joined by a horizontal upper trendline (resistance). 2. At least two higher lows are joined by a rising lower trendline. 3. Confirmation of the breakout requires a candle close above resistance. |
| Understanding the Cup and Handle Pattern | Within an uptrend, the cup and handle develops as a bullish continuation formation. 1. Between two broadly level highs, price creates a rounded bottom known as the cup. 2. Near the cup’s right-hand high, a minor pullback creates the handle. 3. Confirmation of the breakout requires a candle close above resistance at the cup’s top. |
| Understanding the Bull Flag Pattern | Within a strong uptrend, the bull flag develops as a bullish continuation formation. 1. The flagpole is created by a steep price advance. 2. A small downward-sloping or sideways channel then contains price movement, forming the flag. 3. Confirmation of the breakout requires a candle close above the flag’s upper boundary. |
