Reversal patterns are those chart formations that signal that the ongoing trend is about to change course. If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and that the price will head down soon. Conversely, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on. In this lesson, we covered six chart patterns that give reversal signals.
Can you name all six of them? To trade these chart patterns, simply place an order beyond the neckline and in the direction of the new trend. A reasonable stop loss can be set around the middle of the chart formation. For example, you can measure the distance of the double bottoms from the neckline, divide that by two, and use that as the size of your stop.
Continuation chart patterns are those chart formations that signal that the ongoing trend will resume. Usually, these are also known as consolidation patterns because they show how buyers or sellers take a quick break before moving further in the same direction as the prior trend.
Note that wedges can be considered either reversal or continuation patterns depending on the trend on which they form. To trade these patterns, simply place an order above or below the formation following the direction of the ongoing trend, of course.
For example, when trading a bearish rectangle, place your stop a few pips above the top or resistance of the rectangle.
Bilateral chart patterns are a bit more tricky because these signal that the price can move either way. This is where triangle formations fall in. Remember when we discussed that the price could break either to the topside or downside with triangles? To play these chart patterns, you should consider both scenarios upside or downside breakout and place one order on top of the formation and another at the bottom of the formation.
If one order gets triggered, you can cancel the other one. The only problem is that you could catch a false break if you set your entry orders too close to the top or bottom of the formation.
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