Reversal patterns are chart patterns that indicate a change in trend. While there are several reversal patterns, here we will refer to just two of them.

Double Top/ Double Bottom

One of the major reversal patterns is that of the double top (and its counterpart, the double bottom). The double top, as its name implies, consists of two similar peaks, separated by a moderate trough. The double top forms after an extensive period of uptrend, and usually marks an intermediate, if not long-term, change from bullish to bearish sentiment in price. Though many potential double tops may form along the uptrend, the reversal cannot be confirmed until key price support has been broken.

The double bottom is the exact opposite: This reversal pattern signifies a change from bearish to bullish trend, and is made up of two consecutive bottoms, roughly equal, separated by a moderate peak.

Double Top example:

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Head and Shoulders Top/ Head and Shoulders Bottom

A Head and Shoulders Top reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak – the head – being the highest, and the two outside peaks – the shoulders – being lower and roughly equal. The reaction lows of the first two peaks usually form support, or a neckline.

A Head and Shoulders Bottom reversal pattern forms after a downtrend, and its completion also marks a trend reversal. In this case, the pattern contains three successive troughs with the middle trough – the head – being the lowest and the two outside troughs – the shoulders – being high and roughly equal. The reaction highs of the first two troughs usually form resistance, or a neckline.

An important principle in head and shoulder formation is that the neckline that had previously served as support turns into resistance after it has breached (or, in the case of head and shoulder bottom, the resistance turns into support). Should the price return above the neckline, it is then no longer a head and shoulders pattern.

Head & Shoulders Top example:

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