Some Important Forex Reversal Patterns

Tuesday, February 09, 2010

Here are descriptions of a number of important reversal patterns which should help you detect them better as well as improving your trading results.

Double Top and Bottom Patterns

Double top patterns, which are also called “M” patterns, are initially formed by a long rise in trading price. The shape then continues with two tops, separated by a valley, before terminating with a significant drop in the trade price. Double bottom patterns are referred to as “W” patterns and commence with a long drop in currency price, followed by two bottoms separated by a hill, and ending with a sharp price rise.

The main characteristics of top and bottom patterns are the following. Tops and bottoms are significant reversal patterns that usually mark the end of a long term price trend. Tops are usually more fluctuant and shorter that bottoms. The double top and bottom trends are strong verification signs of a change in currency trading direction.

Triple Top and Bottom Patterns

A triple top is a currency trading pattern where the price rebounds of a level three times and is a very strong indication of a powerful resistance level. Similarly, a triple bottom pattern occurs when the price retracts from its support level three times which again indicates a condition of very strong buying interest.

Head and Shoulders Pattern

This well-known pattern is formed by three peaks. The center peak, or head, is slightly higher than its two lower, and not necessarily symmetrical, shoulders. The bottom of the two shoulders can be joined by a line called the neckline.

The neckline is rarely symmetrical or perfectly horizontal because of price fluctuations. This pattern is again a strong reversal sign and is not complete until the neckline is broken. A good policy in order to confirm the momentum of the reversal is to wait for two successive closes below the neckline on at least an hourly chart. The real confirmation of this pattern is the formation of the right shoulder, which is normally accompanied by a definite drop in lower volatility.

Many experts use the distance between the head top and neckline to project the target levels for their trades. They do this by measuring the distance from the neckline to the head in pips and projecting the same distance below their entry point.

V- Pattern

The V pattern is unusual because it occurs when a sharp trend reverses swiftly from one direction to the other without warning.
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