What is Reversal Pattern?
A reversal pattern is a chart formation that signals the current trend is ending and the price is likely to change direction, including patterns like head and shoulders, double tops/bottoms, and wedges.
Reversal Pattern Explained
Reversal patterns are among the most powerful technical signals because they identify potential trend changes early. The head and shoulders pattern is considered the most reliable reversal signal. Double tops and bottoms are also widely watched. The key to trading reversals is waiting for the pattern to complete (neckline break) rather than anticipating it. False reversals are common, so confirmation is essential.
Real-World Example
A stock makes three peaks: $100 (left shoulder), $105 (head), $101 (right shoulder) with a neckline at $95. When the price breaks below $95, the head and shoulders pattern is confirmed, with a measured target of $85 ($95 minus the $10 pattern height).
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