Reversal Trading Patterns

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

When stock indices price reaches such a point it starts to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how and start using them. There are four types:

• Double Top
• Double Bottom
• Head & shoulders
• Reverse Head & shoulders

This learn indices trading tutorial will only cover double tops and bottoms, for the other 2, read this other tutorial: head & shoulders and reverse head & shoulders

Double Tops

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

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

In Indices, this formation is used as a early warning signal that a bullish indices trend is about to reverse. However, it is only confirmed once the neckline is broken and the stock indices trading market moves below the neckline. Neckline is just another name for last support level formed on Indices chart.

Summary:

• Forms after an extended move upwards
• This formation indicates that there will be a reversal in stock indices trading market
• We sell when stock indices price breaks out below the neckline: see below for the explanation.

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

M-Shaped

Double Bottom

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

This formation is considered complete once stock indices price makes the second low & then penetrates the highest point between the lows, called the neckline. The buy indication from this bottoming out signal occurs when stock indices trading market breaks-out the neck line to the upside.

In Indices, this formation is an early warning signal that the bearish indices trend is about to reverse. It's only considered complete/completed once the neckline is broken. In this formation the neckline is the resistance level for the indices price. Once this resistance is broken the stock indices trading market will move up.

Summary:

• Forms after an extended move downward
• This formation indicates that there will be a reversal in stock indices trading market
• We buy when stock indices trading price breaks out above neckline: see below for an explanation.

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

W-Shaped