Reversal Trade Setups

These patterns are formed after the stock market has had an extended move up or down and the stock price reaches a strong resistance or support respectively.

When price reaches and gets to such a point it begins to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how & start using them. There are 4 types:

• Double Tops
• Double Bottom
• Head & shoulders
• Reverse Head & shoulders

This learn course will only cover double tops and bottoms, for the other 2, read this other article: head and shoulders and reverse head and shoulders

Double Top

This is a reversal trading pattern setup which forms after an extended upwards trend. As its name implies, this setup is made up of 2 consecutive peaks which are roughly equal, with a moderate trough in between.

This setup is considered complete once the price makes the second peak and then penetrates the lowest point between the highs, called the neck-line. The sell stock signal from this formation occurs when the stock market breaks-out below the neck line.

In Indices, this setup is used as a early warning that the bullish trend is about to reverse. However, it is only confirmed once the neck line is broken and the stocks market crosses below the neckline. Neck-line is just another term/name for last support zone formed on the trading chart.

Summary:

• Forms after an extended move upward
• This setup formation indicates that there'll be a reversal in market
• We sell when the price breaks-out below the neck-line: see below for the explanation.

The double top look like an M-Shape, the best reversal stock signal is where the second top is lower than the first one as pictured below, this means the reversal signal setup can be confirmed by drawing a downwards trend line such as shown below. If a trader opens a sell stock signal the stop loss will be set just above this down-wards trend line.

M-Shaped

Double Bottoms

This is a reversal trade pattern which forms after an extended downward trend. It's made up of 2 consecutive troughs that are roughly equal, with a moderate peak in between.

This setup is considered complete once the price makes the second low & then penetrates the highest point between the lows, called the neckline. The buy indication from this bottoming out signal happens when trading market breaks-out the neckline to the up-side.

In Indices, this setup formation is a early warning that the bearish trend is about to reverse. It's only considered complete/completed once the neck-line is broken. In this formation the neckline is the resistance area for the price. Once this resistance is breached the stock trading market will move upward.

Summary:

• Forms after an extended move downwards
• This pattern reflects that there'll be a reversal in market
• We buy when the price breaks out above neckline: see below for an explanation.

The double bottom setup look like a W Shape, the best reversal stock signal setup is where the second bottom is higher than the first one as pictured below, this means the reversal signal setup can be confirmed by drawing an upwards trend line like as illustrated below. If a trader opens a buy stock signal the stop loss order will be placed just below this up trend line.

W-Shaped

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