Reversal patterns are chart patterns in technical analysis that signal the end of an existing trend and the start of a new trend in the opposite direction. A reversal chart pattern at a market top signals a possible change from an uptrend to a downtrend, and a reversal chart pattern at a market bottom signals a possible change from a downtrend to an uptrend.
Traders trade trend reversal patterns in 3 steps: 1) wait for a candle to close beyond the neckline of the reversal chart pattern, 2) enter a position at the close of that breakout candle or on a retest of the broken neckline, and 3) place a stop-loss beyond the opposite extreme of the reversal chart pattern, with a price target projected from the breakout.
What Are Reversal Chart Patterns?
A reversal chart pattern is a pattern formation on a chart that shows an existing trend losing strength and a new trend starting in the opposite direction. A candlestick reversal pattern describes one to three candles, while a reversal chart pattern is built from several swings and often takes weeks or months to form on the daily chart.
Reversal chart patterns that form at market tops are bearish reversal patterns, because they signal a change from an uptrend to a downtrend. Reversal chart patterns that form at market bottoms are bullish reversal patterns, because they signal a change from a downtrend to an uptrend.
A reversal chart pattern at a market top is also called a distribution pattern, because traders sell the asset more eagerly than they buy it. A reversal chart pattern at a market bottom is also called an accumulation pattern, because traders buy the asset more actively than they sell it.
How Do Reversal Chart Patterns Work?
To explain how reversal chart patterns work, we need to look at price action and the balance between buyers and sellers. At a market top, buyers push price to a peak and then fail to push price higher on the next attempt, which shows buying pressure weakening. At a market bottom, sellers push price to a trough and then fail to push price lower on the next attempt, which shows selling pressure fading.
When the side that drove the existing trend loses control, the other side takes over and a new trend can start. Most reversal chart patterns are built from 5 parts: 1) an existing trend, 2) peaks or troughs, 3) a neckline or trendline, 4) a breakout, and 5) volume.
| Part | What the part is | Why the part matters |
|---|---|---|
| 1) Existing trend | The uptrend or downtrend before the reversal chart pattern | A reversal chart pattern needs an existing trend to reverse |
| 2) Peaks or troughs | Two or more failed attempts to push price past the same price area | Each failed attempt shows the side driving the existing trend losing strength |
| 3) Neckline or trendline | The line through the troughs of a bearish pattern or the peaks of a bullish pattern; wedges use an upper trendline and a lower trendline | The breakout candle has to close beyond the neckline or trendline |
| 4) Breakout | A candle close beyond the neckline or trendline | The breakout completes the reversal chart pattern |
| 5) Volume | The number of trades on each candle (tick volume in spot forex) | Rising volume on the breakout candle supports the new trend |
| Important: A double top that forms inside a sideways range, with no uptrend before it, has a much higher chance of failing, so always check for an existing trend before trading a reversal chart pattern. |
|---|
What Are the Most Common Reversal Chart Patterns?
The most common reversal chart patterns are 1) the head and shoulders and inverse head and shoulders, 2) the double top and double bottom, 3) the triple top and triple bottom, 4) the rising wedge and falling wedge, 5) the rounding top and rounding bottom, and 6) the V-shaped top and V-shaped bottom. The following table lists all 12 reversal chart patterns in this guide, with the signal, the confirmation and the price action that cancels each reversal chart pattern.
| Reversal chart pattern | Signal | Forms after | Confirmation | Invalidated when |
|---|---|---|---|---|
| Head and shoulders | Bearish | Uptrend | A candle closes below the neckline | The right shoulder rises above the head |
| Inverse head and shoulders | Bullish | Downtrend | A candle closes above the neckline | The right shoulder falls below the head |
| Double top | Bearish | Uptrend | A candle closes below the neckline through the trough | The second peak closes clearly above the first peak |
| Double bottom | Bullish | Downtrend | A candle closes above the neckline through the peak | The second trough closes clearly below the first trough |
| Triple top | Bearish | Uptrend | A candle closes below the neckline through the troughs | A candle closes clearly above the three peaks |
| Triple bottom | Bullish | Downtrend | A candle closes above the neckline through the peaks | A candle closes clearly below the three troughs |
| Rising wedge | Bearish | Uptrend | A candle closes below the lower trendline | A candle closes above the upper trendline |
| Falling wedge | Bullish | Downtrend | A candle closes above the upper trendline | A candle closes below the lower trendline |
| Rounding top | Bearish | Uptrend | A candle closes below the neckline at the base of the curve | Price makes a new high above the curve |
| Rounding bottom | Bullish | Downtrend | A candle closes above the neckline at the top of the curve | Price makes a new low below the curve |
| V-shaped top | Bearish | Strong uptrend | A sharp fall straight after the peak, with no neckline | Price climbs back above the peak |
| V-shaped bottom | Bullish | Strong downtrend | A sharp rise straight after the trough, with no neckline | Price falls back below the trough |
Head and Shoulders and Inverse Head and Shoulders Patterns
The head and shoulders pattern is a bearish reversal chart pattern with three peaks after an uptrend: 1) a left shoulder, 2) a higher peak called the head, and 3) a right shoulder at roughly the level of the left shoulder. The neckline connects the two troughs between the three peaks, and the head and shoulders pattern completes when a candle closes below the neckline.
The inverse head and shoulders (also called the inverted head and shoulders) is the bullish reversal chart pattern which is the mirror image of the head and shoulders pattern at the end of a downtrend. The inverse head and shoulders has three troughs, with the head deeper than the two shoulders, and completes when a candle closes above the neckline through the two peaks between the troughs. The head and shoulders pattern and the inverse head and shoulders are among the most widely followed reversal chart patterns in technical analysis.
Double Top and Double Bottom Patterns
The double top pattern is a bearish reversal chart pattern with two peaks at roughly the same resistance level and one trough between the two peaks, which forms an M-shape. The neckline of a double top runs through the trough, and the double top completes when a candle closes below the neckline after buyers fail twice to push price higher.
The double bottom pattern is the bullish mirror image of the double top, with two troughs at roughly the same support level and one peak between the two troughs, which forms a W-shape. The double bottom completes when a candle closes above the neckline through the peak, after sellers fail twice to push price lower.
The two peaks of a double top, or the two troughs of a double bottom, should be close to identical in price. A second peak that closes clearly above the first peak is more likely part of the existing uptrend than a double top.
Triple Top and Triple Bottom Patterns
The triple top pattern is a bearish reversal chart pattern in which price tests the same resistance level three times after an uptrend and fails each time. The triple bottom pattern is the bullish version, with three troughs at roughly the same support level after a downtrend.
Triple tops and triple bottoms are rarer than double tops and double bottoms, and the third failed attempt at the level often gives a triple top or triple bottom more weight. The neckline, the confirmation and the price target of a triple top or triple bottom follow the same rules as the double top and double bottom.
Rising Wedge and Falling Wedge Patterns
The rising wedge pattern is a bearish reversal chart pattern with two converging trendlines that both slope upward, where the lower trendline rises more steeply than the upper trendline. A rising wedge after an uptrend shows buying pressure weakening and completes when a candle closes below the lower trendline.
The falling wedge pattern is the bullish version, with two converging trendlines that both slope downward and an upper trendline that falls more steeply than the lower trendline. A falling wedge after a downtrend shows selling pressure fading and completes when a candle closes above the upper trendline.
Wedge patterns can be reversal patterns or continuation patterns, depending on the trend each wedge forms in. A rising wedge inside a downtrend is a bearish continuation pattern, and a falling wedge inside an uptrend is a bullish continuation pattern.
Rounding Top and Rounding Bottom Patterns
The rounding bottom pattern, also called a saucer, is a bullish reversal chart pattern that forms a smooth, curved arc at the end of a downtrend. Inside a rounding bottom, selling pressure fades slowly and buying pressure builds slowly, and the rounding bottom completes when a candle closes above the neckline at the top of the curve.
The rounding top pattern is the bearish mirror image of the rounding bottom at the end of an uptrend, with buying pressure fading slowly until a candle closes below the neckline at the base of the curve. Rounding tops and rounding bottoms are the slowest reversal chart patterns to form and are easier to see on weekly and monthly charts.
V-Shaped Top and Bottom Reversal Patterns
The V-shaped bottom, also called a spike bottom, is a bullish reversal chart pattern in which price falls sharply to a trough and rises sharply straight away, with no consolidation phase between the two moves. The V-shaped top is the bearish version, with a sharp rise to a peak followed straight away by a sharp fall.
V-shaped tops and V-shaped bottoms are driven by a sudden change in market sentiment. A V-shaped top or V-shaped bottom has no neckline to wait for, so a V-shaped reversal is hard to trade in real time and is easier to see after the reversal has happened.
How Do You Trade Reversal Chart Patterns?
Trading reversal patterns follows 4 steps: 1) confirm the breakout, 2) choose an entry strategy, 3) place the stop-loss, and 4) set the price target. Each step uses the parts of the reversal chart pattern, so the full trade plan is set before entering a position.
How to Confirm a Reversal Pattern Breakout
A reversal chart pattern is confirmed only when a candle closes beyond the neckline (or beyond the trendline of a wedge) on the trading timeframe. A candle that pushes through the neckline and closes back inside the reversal chart pattern has not confirmed the breakout, and entering a trade on that candle often ends in a fakeout, also known as a fake breakout.
Rising volume on the breakout candle shows that more traders are behind the new trend. Many traders also check that the trend on the higher timeframe agrees with the reversal, and some traders look for RSI, MACD or a candlestick reversal pattern at the neckline as extra confirmation.
Spot forex has no central exchange, so MT4 and MT5 show tick volume, which counts price changes inside each candle instead of traded contracts. On the daily chart, the candle close that confirms the breakout depends on the server time of the broker.
| Pro Tip: On MT4 and MT5, look for a rise in tick volume on the breakout candle, and wait for the breakout candle to close beyond the neckline on your trading timeframe before entering a position. |
|---|
Where to Enter a Reversal Pattern Trade
Traders use 2 main entry strategies to trade reversal chart patterns: 1) a position at the close of the breakout candle beyond the neckline, and 2) a position on a retest of the broken neckline, with a price target projected from the breakout.
The breakout entry gets into the new trend earlier, but the entry price sits further from the stop-loss. After the breakout, the broken neckline often turns into resistance (after a bearish breakout) or support (after a bullish breakout), and the retest entry waits for price to come back to the broken neckline for a better entry price.
Price does not always return to the broken neckline, so traders who wait for the retest miss some trades. A buy stop or sell stop order placed just beyond the neckline can also fill at a worse price than the order price during news releases and weekend gaps, because of slippage and wider spreads.
Where to Place the Stop-Loss on a Reversal Pattern
The stop-loss for a reversal chart pattern goes just beyond the opposite extreme of the reversal chart pattern: above the highest peak of a bearish reversal pattern, or below the lowest trough of a bullish reversal pattern. For a head and shoulders pattern, the stop-loss goes above the head, and for an inverse head and shoulders, the stop-loss goes below the head.
A stop-loss beyond the opposite extreme is a safer stop-loss, because price has to move past the whole reversal chart pattern before the trade is stopped out. A safer stop-loss sits further from the entry price, so the position size has to be smaller to keep the risk per trade the same.
How to Set the Price Target for a Reversal Pattern
The price target for a reversal chart pattern is set by measuring the maximum height of the formation, which is the vertical distance from the most extreme peak or trough to the neckline, and projecting that distance from the breakout point in the direction of the breakout. The price target formula for each direction is:
- Bearish price target = neckline − maximum height of the formation
- Bullish price target = neckline + maximum height of the formation
For a head and shoulders pattern, the maximum height of the formation is the distance from the top of the head to the neckline. The price target is an estimate of how far the new trend may run, and price can stop short of the price target or run well beyond the price target.
Reversal Chart Pattern Example on EUR/USD
The following illustrated example uses an inverse head and shoulders on the EUR/USD daily chart to walk through the 4 trading steps with numbers. The EUR/USD prices are illustrative and are not a trade recommendation.
After a downtrend, EUR/USD forms a left shoulder at 1.0750, a head at 1.0620 and a right shoulder at 1.0740, with both peaks between the troughs at 1.0880. A daily candle then closes at 1.0900, above the flat neckline at 1.0880, which confirms the breakout of the inverse head and shoulders.
| Trade level | Price | How the trade level is set |
|---|---|---|
| Neckline | 1.0880 | Flat line through the two peaks between the troughs |
| Maximum height of the formation | 260 pips | 1.0880 − 1.0620 (head) |
| Price target | 1.1140 | 1.0880 + 260 pips |
| Stop-loss | 1.0605 | 15 pips below the head |
| Breakout entry | 1.0900 | Close of the breakout candle |
| Retest entry | 1.0885 | Retest of the broken neckline |
The next table compares the 2 entry strategies on the same EUR/USD inverse head and shoulders, for a $10,000 account that risks 1% ($100) per trade and a pip value of $10 per standard lot.
| Entry strategy | Risk to stop-loss | Reward to price target | Risk-reward ratio | Position size |
|---|---|---|---|---|
| 1) Breakout entry at 1.0900 | 295 pips | 240 pips | About 1:0.8 | 0.03 lots ($88.50 at risk) |
| 2) Retest entry at 1.0885 | 280 pips | 255 pips | About 1:0.9 | 0.03 lots ($84.00 at risk) |
With the stop-loss below the head, both entry strategies risk more pips than the distance to the price target, so the risk-reward ratio to the price target is below 1:1. The retest entry improves the risk-reward ratio from about 1:0.8 to about 1:0.9, but the retest entry misses the trade if EUR/USD never returns to the neckline.
The position size of 0.03 lots is rounded down from 0.034 lots, so the loss at the stop-loss stays under the $100 risk limit. A trade on this EUR/USD inverse head and shoulders only pays more than the risk if price moves past the price target, which is why traders who use the stop-loss below the head plan the exit before entering a position.
You can practise both entry strategies on a TMGM demo account in MT4 or MT5 before trading with real money. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
Reversal Patterns vs Continuation Patterns: What Is the Difference?
A reversal pattern signals the end of the existing trend, while a continuation pattern signals a pause in the existing trend before the existing trend resumes in the same direction.
| Feature | Reversal patterns | Continuation patterns |
|---|---|---|
| What the pattern signals | The existing trend ends and a new trend starts in the opposite direction | The existing trend pauses and then resumes |
| Where the pattern forms | At a market top or a market bottom | In the middle of an uptrend or a downtrend |
| Breakout direction | Against the existing trend | With the existing trend |
| Common examples | Head and shoulders, double top, double bottom, triple top, rounding bottom | Rectangle, triangle, pennant, flag, cup and handle |
| Wedges | A rising wedge after an uptrend, a falling wedge after a downtrend | A rising wedge inside a downtrend, a falling wedge inside an uptrend |
Traders who expect the existing trend to end look for reversal patterns, and traders who are late to an existing trend look for continuation patterns to join the trend. Both reversal patterns and continuation patterns are confirmed in the same way, by a candle close beyond the line that marks the edge of the pattern.
What Are the Common Mistakes When Trading Reversal Patterns?
The common mistakes when trading reversal patterns come from entering a trade before the reversal chart pattern is complete, or from entering a trade without a plan. Traders make 6 common mistakes:
- Entering a trade before the breakout. Traders who sell at the second peak of a possible double top, before a candle closes below the neckline, are trading a reversal chart pattern that may never complete. Waiting for the candle close beyond the neckline lowers the chance of trading a fakeout.
- Ignoring the higher-timeframe trend. A bearish reversal pattern on the 1-hour chart inside a strong uptrend on the daily chart fails more often. Checking the trend on the higher timeframe before entering a trade shows whether the bigger trend supports the reversal.
- Mistaking a pullback for a double top. A pullback in a strong uptrend can look like the first peak and trough of a double top. Without a candle close below the neckline, the pullback is more likely part of the existing uptrend.
- Placing the stop-loss too close to the entry. A stop-loss inside the reversal chart pattern is often hit by a normal retest of the neckline before price moves toward the price target. Traders use the Average True Range (ATR) indicator to measure how far price normally moves in one candle before choosing a safer stop-loss and a smaller position size.
- Trading without a plan for the entry and the price target. Traders who do not choose between the breakout entry and the retest entry, or who do not measure the price target, often hold a trade with no exit plan. A trading plan sets the entry strategy, the stop-loss, the price target and the position size before entering a position.
- Trading small reversal chart patterns on 1-minute and 5-minute charts. Reversal chart patterns on 1-minute and 5-minute charts form quickly and are less reliable than reversal chart patterns on the 4-hour, daily or weekly chart.
Reversal Chart Patterns FAQ
What Is the Best Reversal Pattern in Forex?
The head and shoulders pattern and the double top and double bottom are the most widely used reversal patterns in forex. The best reversal pattern for a trader is the reversal chart pattern that the trader can spot consistently and trade with a clear plan for the entry, the stop-loss and the price target.
What Timeframe Is Best for Reversal Chart Patterns?
Reversal chart patterns appear on every timeframe, from 1-minute charts to monthly charts, and work the same way on forex, stock, index and commodity charts. A reversal chart pattern on the daily or weekly chart takes weeks or months to form and usually signals a bigger change in trend than the same reversal chart pattern on a 5-minute chart. Many traders use multi-timeframe analysis to spot a reversal chart pattern on one timeframe and check the trend on a higher timeframe.
How Do You Know If a Trend Reversal Is Coming?
A trend reversal is often preceded by a reversal chart pattern, such as a head and shoulders, a double top or double bottom, or a rising wedge or falling wedge. Repeated failed attempts to push price past the same level are an early sign of a trend reversal, but the trend reversal is only confirmed when a candle closes beyond the neckline of the reversal chart pattern.
Check More Neutral Chart Patterns
| Neutral Pattern | Features |
|---|---|
| Symmetrical Triangle Pattern | The symmetrical triangle is a continuation pattern that can break out in either direction. 1. A downward-sloping upper trendline connects at least two lower highs. 2. An upward-sloping lower trendline connects at least two higher lows. 3. The breakout usually follows the direction of the existing trend. |
| Rectangle Pattern | The rectangle is a continuation pattern in which price moves sideways between two horizontal levels. 1. A horizontal resistance line connects at least two similar highs. 2. A horizontal support line connects at least two similar lows. 3. The breakout usually follows the direction of the existing trend. |
| Pennant Pattern | The pennant is a continuation pattern that can be bullish or bearish. 1. A sharp price move forms the flagpole. 2. Price then forms a small triangle with converging trendlines, called the pennant. 3. The breakout usually follows the direction of the flagpole. |
| Butterfly Pattern | The butterfly is a harmonic pattern that can be bullish or bearish. 1. Price forms five points, labelled X, A, B, C and D. 2. Point B retraces 78.6% of the XA swing. 3. Point D extends beyond point X, at the 127% to 161.8% Fibonacci extension of the XA swing. 4. Traders look to buy at point D in a bullish butterfly and sell at point D in a bearish butterfly. |
Check More Trading Pattern Guides
| Guide | What It Covers |
|---|---|
| Reversal Candlestick Patterns | This guide explains how candlestick patterns warn that an uptrend or a downtrend may reverse. 1. Bullish reversal patterns form after a downtrend. 2. Bearish reversal patterns form after an uptrend. 3. Traders wait for a confirmation candle before entering a position. |
| Chart Patterns in Trading | This guide explains how chart patterns form from price swings over many candles. 1. Reversal chart patterns warn that the existing trend may end. 2. Continuation chart patterns show a pause before the existing trend continues. 3. Traders enter a position when a candle closes beyond the trendline that marks the edge of the chart pattern. |
Check More Bearish Chart Patterns
| Bearish Pattern | Features |
|---|---|
| Double Top Pattern | The double top is a bearish reversal pattern that forms after an uptrend. 1. Price makes two highs at a similar level. 2. The swing low between the two highs forms the neckline. 3. The breakout is confirmed when a candle closes below the neckline. |
| Triple Top Pattern | The triple top is a bearish reversal pattern that forms after an uptrend. 1. Price makes three highs at a similar level. 2. The swing lows between the three highs form the neckline. 3. The breakout is confirmed when a candle closes below the neckline. |
| Head and Shoulders Pattern | The head and shoulders is a bearish reversal pattern that forms after an uptrend. 1. Price makes three highs, and the middle high (the head) is the highest. 2. The two outer highs (the shoulders) sit at a similar level. 3. The breakout is confirmed when a candle closes below the neckline, the line drawn across the lows between the three highs. |
| Rising Wedge Pattern | The rising wedge is a bearish pattern that can form as a reversal after an uptrend or as a continuation in a downtrend. 1. Two upward-sloping trendlines move closer together as price makes higher highs and higher lows. 2. The lower trendline (support) is steeper than the upper trendline (resistance). 3. The breakout is confirmed when a candle closes below the lower trendline. |
| Descending Triangle Pattern | The descending triangle is a bearish pattern that usually forms as a continuation in a downtrend. 1. A flat lower trendline (support) connects at least two similar lows. 2. A downward-sloping upper trendline connects at least two lower highs. 3. The breakout is confirmed when a candle closes below the support line. |
| Bear Flag Pattern | The bear flag is a bearish continuation pattern that forms in a strong downtrend. 1. A sharp drop in price forms the flagpole. 2. Price then moves in a small channel that slopes up or sideways, called the flag. 3. The breakout is confirmed when a candle closes below the lower line of the flag. |
Check More Bullish Chart Patterns
| Bullish Pattern | Features |
|---|---|
| Double Bottom Pattern | The double bottom is a bullish reversal pattern that forms after a downtrend. 1. Price makes two lows at a similar level. 2. The swing high between the two lows forms the neckline. 3. The breakout is confirmed when a candle closes above the neckline. |
| Triple Bottom Pattern | The triple bottom is a bullish reversal pattern that forms after a downtrend. 1. Price makes three lows at a similar level. 2. The swing highs between the three lows form the neckline. 3. The breakout is confirmed when a candle closes above the neckline. |
| Inverse Head and Shoulders Pattern | The inverse head and shoulders is a bullish reversal pattern that forms after a downtrend. 1. Price makes three lows, and the middle low (the head) is the lowest. 2. The two outer lows (the shoulders) sit at a similar level. 3. The breakout is confirmed when a candle closes above the neckline, the line drawn across the highs between the three lows. |
| Falling Wedge Pattern | The falling wedge is a bullish pattern that can form as a reversal after a downtrend or as a continuation in an uptrend. 1. Two downward-sloping trendlines move closer together as price makes lower highs and lower lows. 2. The upper trendline (resistance) is steeper than the lower trendline (support). 3. The breakout is confirmed when a candle closes above the upper trendline. |
| Ascending Triangle Pattern | The ascending triangle is a bullish pattern that usually forms as a continuation in an uptrend. 1. A flat upper trendline (resistance) connects at least two similar highs. 2. An upward-sloping lower trendline connects at least two higher lows. 3. The breakout is confirmed when a candle closes above the resistance line. |
| Cup and Handle Pattern | The cup and handle is a bullish continuation pattern that forms in an uptrend. 1. Price forms a rounded bottom, called the cup, between two highs at a similar level. 2. A small pullback, called the handle, forms near the high on the right side of the cup. 3. The breakout is confirmed when a candle closes above the resistance line at the top of the cup. |
| Bull Flag Pattern | The bull flag is a bullish continuation pattern that forms in a strong uptrend. 1. A sharp rise in price forms the flagpole. 2. Price then moves in a small channel that slopes down or sideways, called the flag. 3. The breakout is confirmed when a candle closes above the upper line of the flag. |
