Five common reversal patterns and their usage in trading

Head and Shoulders

Head and Shoulders is the most well-known and reliable major reversal pattern. Most other reversal patterns are just variations of the head and shoulders. When it forms, the left shoulder is usually formed in the strongest upward trend, and the trading volume reaches the maximum; after a small correction, it rises again to form the head, and the trading volume shrinks; after another correction (the amplitude may be slightly larger), it rises to form the right shoulder, and the trading volume dries up.

The neckline is the key position of the head and shoulders top/bottom. Once the neckline is broken, fear gathers and selling is overwhelming. Although there is a pullback afterwards, the pullback usually cannot cross the neckline price, which is a relatively safe buying and selling point for the head and shoulders top.

Figure 1 Head and Shoulders Structure

Some precautions for the head and shoulders top:

(1) If the head and shoulders are not proportional, it should not be regarded as a head and shoulders top, and the operation strategy of the head and shoulders top should not be applied.

(2) In theory, the left shoulder of the head and shoulders top has the largest trading volume, the head is second, and the right shoulder has the least, but this is not the case in all cases.

(3) Breaking through the neckline is an important condition for confirming the head and shoulders top. Once the neckline is broken, the head and shoulders pattern is completed. After the price breaks through the neckline downward, if it returns to the neckline again, it is a serious warning, indicating that the initial breakthrough may be a false breakthrough. Such a head and shoulders pattern is a false head and shoulders pattern, and the price will return to the original trend.

(4) After the head and shoulders top pattern is formed, the price breaks through the neckline, and the trading volume will reach a trough in a short period of time. This is a manifestation of market hesitation. There is usually a pullback process afterwards, which makes the price return to the neckline level.

Figure 2 Head and Shoulders Top Actual Combat Example

Triple Top

The triple top is only slightly different from the head and shoulders pattern. Its characteristic is that the height of the three peaks or valleys is almost the same. It is often difficult to distinguish whether a certain pattern is a head and shoulders pattern or a triple top. Fortunately, the meanings of the two patterns are the same. The triple top pattern is considered to be completed only after the support area formed by the two bottom points is broken.

Figure 3, Triple Top Structure

Figure 4, Triple Top Practical Example

When the third top of the triple top has very small trading volume, it shows a sign of falling, while when the third bottom of the triple bottom rises, the trading volume increases greatly, which shows that the price has a tendency to break through the neckline.The stable position of the triple top is to short after breaking the neckline and then pulling back without exceeding the neckline; aggressive friends can also test the previous high for the third time and enter the market to short when encountering a pullback!

Double top

Double bottom reversal refers to the two peaks formed at the top of the price, which is often called an "M" type reversal.

Figure 5 Double top structure diagram

The double top reversal pattern does not necessarily mean a reversal of the price. It is also possible that the price will rise in the process of falling back to the neckline due to the support of the support line. At this time, the price moves in the area between the support line and the previous two high points, forming a variety of patterns such as triple tops and triangles, but this possibility is very small.

The farther the distance between the two peaks, that is, the longer the time it takes to form the two tops and bottoms, the greater the potential for a double top reversal in the future, and the more violent the fluctuations after the reversal. The rise (fall) after the double peak pattern breaks through is 1-3 times the neck height of the pattern itself.

For the double top structure, we can generally choose to enter the market to short after breaking the trend line and to enter the market to short after breaking the neckline and pulling back without exceeding the neckline.

Figure 6, Double Top Practical Example

V-shaped top

V-shaped top is a kind of violent reversal pattern that is difficult to grasp. It is a sharp change graph that describes the price or index trend similar to an inverted V.

V-shaped top often appears in a plunge, mostly due to the influence of news or the reaction of market emotional operations. When it happens, there is almost no sign. When you see it, you are either sitting on the clouds or falling into the ground. It is the favorite of extreme investors.

Figure 7, V-shaped top structure diagram

When we judge the V-shaped top, we can combine other indicators to judge, such as the K-line price deviates too far from the moving average and the deviation is too large; from the perspective of the trend line, after breaking the trend line, a V-shaped reversal may be formed. The V-shaped top trend must have obvious volume enlargement at the turning point. The larger the volume, the more violent the turning point. After the V-shaped top is formed, the judgment of the second highest point of the same level is also a difficult problem! If the retracement is relatively large, breaking the center, and retracement to the lower edge of the center, you can choose to short.

Figure 8. Practical example of V-shaped top

Arc top

Arc top refers to the price or index showing a round top trend. When the price reaches the high point, the rise slows down and then gradually declines. It is a peak pattern, indicating that the market will fall in the future. The whole pattern takes a long time to complete and often appears in combination with other patterns. After the market has experienced a wave of rise and fall in the initial stage, when the long side is slightly stronger than the short side, the long side weakens, while the short side continues to strengthen. In the middle period, the long and short sides are balanced, and the price fluctuation is very small. In the later period, the short side exceeds the long side, and the price falls. When the neckline is broken downward, a rapid decline will occur.(Qilehui official WeChat public account platform ID: qlhclub)

Figure 9, arc top structure diagram

Figure 10, arc top practical example

The above five reversal patterns are the most common reversal patterns we usually encounter, and they are also structural patterns that we need to master and use skillfully! Careful friends will find that there is a certain internal connection between the first four patterns and structures! In order to help everyone better understand the reversal patterns and accurately find the trend reversal signal in practical applications, we can use a picture below, combined with the wave theory, to give you a brief explanation! (Qilehui official WeChat public account platform ID: qlhclub)

Figure 11

As shown in the above figure, if the rebound position of wave b is just near the high price of wave 3, then it is possible to form a head and shoulders top pattern; if wave 5 shrinks due to negative news, it is possible to form a triple top pattern; if wave A rebounds too much under the stimulation of positive news, it can form a double top structure near the high price of wave 5; wave a retreats too much and breaks the low point of wave 5, which is a typical V-shaped reversal!