Reversal and Continuation Patterns

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In technical analysis, transitions between rising and falling trends are often signaled by price patterns. A price pattern is a known figure which can define how likely a specific price movement afterward. When a pattern shows a possible change in the trend direction, it is named a reversal pattern, and when the trend continues its previous order- it is a continuation pattern.

Reversal Patterns

It is the price pattern beyond which price action is most likely to move in a reversal direction. The change in the prevailing trend is known as a reversal pattern. These patterns indicate traders about periods when bulls or bears have run out of energy.

So these are examples of reversal patterns:

  • Head and shoulders

  • Double tops

  • Double bottoms

Head and Shoulders

Patterns usually appear on the market as three spikes: one peak followed by a second one with bigger amplitude and the 3rd one that repeats the 1st one. This pattern can predict an either bullish or bearish trend. If this pattern is recognized on an uptrend, it might signal the trend reversal shortly (bearish). Also, it works conversely, so if a downtrend shows a head and shoulders pattern, it may result in a trend reversal to the upside(bullish).

Double Top and Double Bottom

Double tops and bottoms signal that the trend has made two unsuccessful attempts to break through a support or resistance level, resulting in a trend reversal (So it means that the future trend will be bearish or bullish, depending on if its top or a bottom pattern).

  • Double tops pattern: It is one of the reversal patterns that indicate a change of direction from rising to descending, and its shape is in the form of a letter M; this form consists of two consecutive peaks separated by one low

  • Double bottoms pattern: It is one of the reversal patterns that indicates a change of direction from descending to rising and has a W-shaped pattern. This pattern consists of two consecutive bottoms separated by one top

  • The double top pattern can be found on all timeframes.

  • The bottom between the two peaks in the pattern of the double peaks indicates a signal line

  • When the price breaks the signal line after creating the second upper, we confirm the pattern.

  • The target price of the double top pattern in length is equal to the size of the pattern.

  • The amount of risk you use to trade the double tops pattern should be less than the pattern size in length; this way, you will get more than a 1: 1 profit/loss ratio, making your strategy on the double tops more profitable.

  • The identical twin with the double tops pattern is the double bottoms pattern. All of the rules we’ve discussed are fully applicable to it but in the opposite direction.

Continuation Patterns

It is a price pattern that presents temporary uncertainty about the direction of the future trend. It can play a role as a pause, so while a price pattern is forming, there is no way to know if the trend will continue or reverse.

So these are examples of continuation patterns:

  • Pennants

  • Flags

  • Wedges

Pennant Patterns

Pennant can be identified by two converging trend lines and a more horizontal position. This shape resembles a small symmetrical triangle.

The formation of these patterns on the chart should be preceded by a sharp and nearly straight line of price action. As it develops up or down, these patterns set markets that appear to be outgrowing themselves and must pause for some time before moving in the same direction.

Flag Patterns

The formation of these patterns on the chart should be preceded by a sharp and nearly straight line of price action. As it develops up or down, these patterns set markets that appear to be outgrowing themselves and must pause for some time before moving in the same direction.

After a sharp rise, the trend takes a pause. The “flag” moves prices in the opposite direction. But this happens only until the moment when there is a breakout with continued growth. Typically, a “flag” appears in the middle of a trend.

Rising and Falling Wedges

The wedge model has a significant slope – up or down. Typically, like a flag, the wedge is tilted against the direction of the prevailing trend. Thus, a downward wedge is considered a bullish pattern, and an upward wedge is regarded as a bearish pattern.

Whaletank Team

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