Reversal Patterns Used In An Online Trade

When speaking of a pattern being one of consolidation, or continuation, it implies once the pattern is resolved and prices break out they will tend to do so in the direction of the previous trend in the online trade. Conversely, when prices break out of a reversal pattern they tend to do so in the direction opposite from the prior trend.

The most common reversal patterns include; the head and shoulders top and bottom, double tops and bottoms, triple tops and bottoms, key reversals, island reversals, rounding bottoms and tops, "V" formations or spike bottoms and tops.

A reversal pattern implies that the previous trend will be reversed when the pattern is complete. After an advance, a Head and Shoulders reversal patterns marks a change in trend. A break below neckline support indicates that the pattern is complete and the prior up trend has reversed. As shown in this graph we have a -V- formation.

Reversal Pattern Traits

· The existence of a prior major trend is an important prerequisite for any reversal pattern.

· The first signal of an impending trend reversal is often the breaking of an important trend line.

· The larger the pattern the greater is the price movement potential. The height of the pattern measures the volatility, the width of the pattern measures the amount of time required to build and complete the pattern.

The greater the height of the pattern (the volatility) and the longer it takes to build - the more important the pattern becomes and the greater the potential for the ensuing price move.

· Topping patterns are usually shorter in duration and more volatile than bottoms. Tops usually take less time to form than bottoms

· Volume is usually more important on the upside. Volume should generally increase in the direction of the market trend and is an important confirming factor in the completion of all price patterns. The completion of each pattern in the online trade should be accompanied by a noticeable increase in volume, particularly at market bottoms. Market tops tend to fall on their own weight once a trend reversal is underway.