Double Top and Double Bottom

The Double Top and Double Bottom patterns are quite common and easily recognizable chart patterns which occur on all timeframes and in all markets. Let’s take a closer look at this classic reversal pattern.




The image on the left represents an ideal Double Top Formation (which is the mirror image of a Double Bottom) while the chart on the right represents a Real World example.

The Double Top is a Reversal pattern that is expected to occur after a lengthy upward advance in price. Buyers push prices to new highs on the first impulse up and then profit taking pushes price to a normal down-swing. Buyers step back in on the pullback but are unable to exceed the previous peak in price as sellers begin to unload their inventory, contributing to the supply/demand imbalance as price fails to make a new high and then reverses at the prior resistance level.

How to Trade a Double Top or Double Bottom

Generally, you won’t be able to act upon the pattern until price begins to reverse at the prior resistance level. You can increase your confidence that the pattern is forming if you find one or more of the following:

• Price is ‘bumping up’ against a prior resistance level from a past price
• Price is ‘bumping up’ against a key moving average on a particular timeframe
• Price has achieved a Fibonacci or other Price Projection Target
• A Negative Momentum Divergence has formed on the Second Price Swing
• A Volume Divergence has formed on the Second Price Swing (lower volume than on the first swing)

Once you believe price is experiencing a Double Top formation, enter short as closely as possible when price begins to inflect (turn down) at the previous resistance price. Place your stop just beyond the prior swing high. If the pattern resolves into a true trend reversal, you will stand to profit from the pattern as a low-risk trading opportunity.

You can obtain a Minimum Price Objective by measuring the distance from the resistance line (price at which the Double Top forms) down to the support price at the middle swing of the pattern. Take this value and subtract it from the middle-swing support price to obtain an initial target.

All rules would be reversed for trading a double bottom.

Source : here

Head and Shoulders

The Head and Shoulders Chart Pattern might be one of the most well-known and easiest to recognize patterns. It’s classically known as a Reversal Top Pattern, though the less common “Inverted” Head and Shoulders Pattern is known as a Bottom Reversal Pattern.

The Head and Shoulders Pattern (H&S) forms after a large uptrend when price is forming a “topping” pattern of declining strength. Below is a good example of the pattern which preceded the absolute top in the particular stock:


Price formed an initial rally and retracement that later became the Left Shoulder before finding support and rallying to new highs to form what later became the “Head” and then price fell back to trade at the support from the prior low. At this point, we might suspect we have a H&S pattern but we would need to wait for a lower high to form which would make up the right shoulder to complete the pattern.

Indeed price does form a lower high and comes back to trade at the neckline, or the horizontal line that connected the various price lows. Only then can we trade the pattern with any confidence.

How to Trade a Head and Shoulders

Once you see the three swings that comprise a H&S pattern, you can sell-short once price trades beneath the “Neckline” support level and place a stop above the swing high of the Right Shoulder.

What’s interesting about the H&S pattern is that it has a built-in “Measuring Objective” or “Price Projection Target” when price breaks beneath the support line of the neck. Traditionally, we would measure the distance from the Head to the Neckline and then take this distance and subtract it from the Neckline once price breaks below it for a Price Objective.

If the Head peaks at $100 and the Neckline is established at $80, then once the price breaks below the Neckline out of the Right Shoulder, we would then subtract $20 (the distance from the Head to the Neckline) from $80 (the Neckline) to give us a price projection target of $60. The blue dotted vertical lines represent the Measuring Objective on the chart above.

Volume and Psychology Insights

Analyzing Volume can help you confirm the pattern as it is developing, which can raise your confidence of having a higher probabily trade. Keep in mind that as the Left Shoulder is forming, investors are bullish and may be aggressively participating (buying) the stock, so we would expect to see enthusiasm and high volume forming on the Left Shoulder - nothing seems amiss.

The Head forms a higher high which is promising to the Buyers, but often we observe a divergence in volume and perhaps momentum oscillators as well. While price is making a higher high, fewer shares are being exchanged and the process of “Distribution” may be underway. Remember a rally needs buyers to keep it going, and price can rise with lower volume, but that is a clear warning sign that something is not right - or what is known as a “Divergence” or “Non-Confirmation.”

The Right Shoulder forms a lower swing high and often we see far less volume here than on the Left Shoulder or perhaps the Head. Investors might begin to recognize this classic pattern forming and may be preparing themselves to sell should price break the horizontal support line that has been established. There may still be bullish sentiment present, but it may be reduced over the enthusism that created the “Head” or absolute price peak.

Once price manages to break beneath the known support line (the Neck), many aggressive traders will begin shorting at this point and those holding positions will likely begin selling them, which can create a surge of volume along with a quick acceleration of price to the downside as more and more investors begin to suspect the stock has put in a top.

In short, expect to see high optimism and high volume on the left shoulder, reduced volume and high to moderate optimism on the Head, and reduced volume and skeptical if not moderate optimism on the Right Shoulder and then a flight to exit (or establish a short trade) once price breaks the neckline which should be confirmed with a spike or rise in volume.

Source : here

Rising Wedge and Falling Wedge

Rising and Falling Wedges are one of the most interesting patterns in technical analysis and pattern recognition. What distinguishes them from triangle consolidation patterns is that price forms an upward or downward sloping coil that precedes the price move. Ascending or Descending Triangles have one trendline that is parallel to the X-Axis while neither trendline is parallel in Wedge Formations.

Here are two examples of the Rising Wedge Pattern, with the first being an Idealized Representation while the second is a real-world example.



What characterizes the Wedge pattern is the converging slope of both trendlines. The trendlines converge to meet at the Apex, though price is expected to eject out of the pattern prior to reaching the full apex (point at which the trendlines converge).

Classic Technical Analysis states the following:

• Rising Wedges are Bearish Reversal Patterns
• Falling Wedges are Bullish Reversal Patterns

While this is not always the case, it is the classic interpretation of the pattern, which gives excellent risk-reward when traded.

How to Trade the Wedge Patterns

For this example, let us assume we have a rising wedge that forms after a lengthy price advance. Let us assume the pattern is a bearish reversal pattern and we are expecting a market top.

A rising wedge needs at least four ‘touches’ or tests of a trendline to confirm the pattern. Remember, a trendline needs at least two points to confirm it as valid. Generally, upon the fourth touch (or test), we would want to be waiting to enter on a breakdown of the lower trendline and place a stop above the upper trendline.

For a more aggressive method of trading rising wedges, you can enter short inside the consolidation inside the 5th swing in price to try for a better execution price. For falling wedges, you would buy on the 5th swing inside the converging trendlines and place a stop beneath the lower trendline.

Most wedges will break-out of the consolidation range anywhere from 66% to 80% of the way to the apex, though some wedges can wait until price reaches the apex for the actual breakout to occur.

Volume Confirmation

The wedge is a consolidation pattern, and as such, we would expect to see the volume trend decline (reduce) as either the Rising or Falling Wedge pattern develops, and then expand as price breaks outward from the pattern. Your confidence is decreased if we see volume surging during the formation of a suspected wedge.

Souce : here

Rounded Reversal

The “Rounded Reversal” Pattern occurs most frequently on the Intraday Charts but it can also provide excellent trading opportunities on higher timeframes.

The Rounded Reversal is similar to the classic “Saucer Top and Bottom” chart pattern, both of which are trend reversal patterns that occur at tops and bottoms.
In this example, Sears Holdings (SHLD) formed an ideal “Rounded Reversal” Pattern on January 21st, 2009 into the 2:00pm lows on its 5-minute intraday chart, giving nimble traders an excellent opportunity.

A Rounded Reversal - in this case - occurs after a downtrend in price as price begins to consolidate at the lows. Often, one can draw an arc around price into the lows as price finds support and then gently begins to rise at the same angle as it declined, forming a Saucer Bottom or symmetrical price arc.

The hallmark of a “Rounded Reversal” bullish pattern is a Positive Momentum Divergence into the new price lows as price begins its initial arc to the upside. In this case and many others, price will form a doji or other reversal candle pattern on the lows combined with a positive momentum divergence.

How to Trade a Rounded Reversal

In this case, we will describe an example like the SHLD chart which represents a Bullish Rounded Reversal. Observe price as being in a downtrend and making new lows, but notice that price seems to consolidate or ‘arc’ at the lows. If price begins a gentle ‘mirror image’ swing off these lows, chances are that price is forming a simple Rounded Reversal Pattern and that you are witnessing the price lows in the making.

Increase your confidence of trading this pattern by observing a Positive Momentum Divergence with the price lows and try to confirm this development with a higher timeframe support area or accompanying reversal candle.

Enter as close as you can to the suspected price lows as price begins to swing back to the upside and place your stop beneath the price lows formed on the most recent downswing.

A Rounded Reversal does not have a built-in price measuring objective, as it is a trend reversal pattern, and traders have found success using Trailing Stops to capture the full reversal these patterns can deliver.

Source : here

Three Push Pattern

The “Three Push” Pattern is a more modern chart pattern that often needs a Momentum Oscillator to confirm its development, though with practice, you can recognize the pattern without the aid of an oscillator.


In this example, we see both a Bullish and Bearish “Three Push” Pattern Reversal on the same chart. The “Three Push” Pattern is a Reversal or Exhaustion Pattern.

To confirm the pattern, we need to see three similar price swings that resemble each other that make subsequent new lows (or new highs). However, the three swings are close together and are roughly symmetrical to each other. The defining characteristic of the “Three Push” Pattern is a Positive Momentum Divergence for a Bullish Three Push (2000-2002) or a Negative Momentum Divergence for a Bearish Three Push (2003-2005).

The particular Momentum Oscillator you use is not as important as identifying the three symmetrical price swings. For this example, I am showing the “3/10 Oscillator” which is a variant of the MACD Indicator with inputs 3, 10, and 16.

Trading the “Three Push” Pattern

In this example, we will assume we have a Bullish Reversal “Three Push” Pattern as in the first part of the chart - reverse the instructions for Bearish Reversals. Price must be in a downtrend and be making new lows. However, you may notice price swings are contracting (shrinking) and perhaps your oscillator is showing a positive divergence (where price makes a new low but your oscillator makes a higher low). Begin watching the price closely and if price makes a third narrow price low but your oscillator registers a second higher low, you have increased confidence the pattern is developing and need to take action (enter) soon.

Enter when you feel the price is beginning to reverse off the third price low and place your stop a comfortable distance beneath this low. There might not be a logical prior point on which to base your stop - aggressive traders will place a wider open stop-loss while conservative traders will prefer to place a tighter, closer stop-loss. Remember that you are trading counter-trend and try not to give too much room for price to move against you.

Since the pattern is a Reversal Pattern without a Measuring Rule (or built-in Price Objective), this pattern works well for position traders when it occurs on the higher time frames. You will need to use other methods to exit the trade, as you will have the potential to enter a trade as close to the price low preceding a trend reversal as possible. Many traders find it acceptable to use Trailing Stops when trading this pattern.

Source : here