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Reversal Stock Trading Chart Patterns

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


When stocks 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 Tops

  • Double Bottoms

  • Head and shoulders

  • Reverse Head and shoulders


This learn stock 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 stock trading pattern that forms after an extended upward stocks trend. As its name implies, this formation is made up of two consecutive peaks that are roughly equal, with a moderate trough in between.


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


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


Summary:


  • Forms after an extended move upwards

  • This formation indicates that there will be a reversal in the stocks trading market

  • We sell when stocks price breaks below the neckline; see below for explanation.

Double Tops candlesticks stocks chart pattern



The double tops look like an M-Shape, the best reversal stock 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 stock trend line as shown below. If a stock trader opens a sell stock signal the stop loss will be placed just above this downward stock trend line.

Double Tops On Stock Trading Chart Drawing a Downward Trendline

M-Shaped


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Double Bottoms

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


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


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


Summary:


  • Forms after an extended move downwards

  • This formation indicates that there will be a reversal in the stocks trading market

  • We buy when stocks price breaks above the neckline; see below for explanation.

Reversal Stock Trading Chart Patterns: Double Tops and Double Bottoms



The double bottoms pattern look like a W-Shape, the best reversal stock 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 upward stock trend line as shown below. If a stock trader opens a buy stock signal the stop loss will be placed just below this upward stock trend line.

Double Bottoms On Stock Trading Chart Drawing an Upward Trendline

W-Shaped

 

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