When the market is climbing or dipping confidently it can be challenging to call the exact moment when the trend will turn. Fortunately, reversal candlestick patterns can help, as they tend to indicate that investor sentiment is about to change. In this article, we’ll explore the most widely adopted reversal patterns, see how they form, and under what circumstances do they forecast a potential bounce back, be it from bearish to bullish, or bullish to bearish.
Reversal patterns are extremely popular among traders of all kinds, as they foreshadow immediate changes in the direction of price action. Studying reversal patterns can help investors more accurately predict market bottoms and peaks which ultimately leads to more profitable trades and strategies.
There are bullish and bearish reversal patterns, but they can sound counterintuitive at first. That’s because bullish reversal patterns start with negative price development that still forecasts a future uptrend, and bearish reversal patterns beginning with positive price action that indicate an upcoming down term.
First up is the Bullish Double Bottom, which is among the most widely used reversal patterns of its time. A Bullish Double Bottom occurs when price action seemingly hits a support level twice in a row. One mild bounce back happens after the first bottom, but this will not be followed by a breakout. Rather, the price is expected to bottom out close to the level of the first floor, and perform a significant increase right after.
A Bearish Triple Top is similar to the Bullish Double Bottom, but on the opposite side. It is easy to confuse this pattern with the Head and Shoulders formation, however, there are distinctive differences between the two. The one that investors should pay careful attention to is that a Bearish Triple Top encompasses three consecutive peaks that have a fairly similar high, while a Head and Shoulders pattern has its middle top significantly higher than the first and last peaks. In any case, the bearish breakout is expected at the third peak.
An Inverted Head and Shoulders pattern is usually a high time frame pattern that indicates a long upcoming bull market. The formation’s shape is quite distinctive, as it consists of a lower low accompanied by two similar lows on either side. It’s important not to mistake this pattern for the Bullish Triple Bottom, as the two tend to have different breakout points.
The last formation on the list is a short time frame pattern called Bullish Ladder Bottom. This pattern is formed by three or more long red candles after each other ended by a short red candle with a relatively long wick on the top and none on the bottom. The pattern indicates that the previously strong seller pressure exhausted at the last candle which should cause buyers to regain control and drive the price up.
All in all, reversal patterns can help investors of all kinds in determining the exact market peaks and bottoms, and while no formation guarantees results, the above-mentioned combinations have become popular for a good reason.
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