Are you struggling with how to make profits with reversal price patterns in Forex? Do you know which reversal price patterns work best and which ones to avoid? If you’re struggling and want to know which are the best patterns to use then you’re in the right place!
You can make profits with reversal price patterns in Forex trading, with trading the best performing patterns. These best reversal price patterns to trade are the double top, double bottom, head and shoulders and the inverted head and shoulders reversal price patterns.
Did you know that having a solid Forex trading education, on the basic reversal price patterns is the starting point for any successful trader! In this trading lesson I will go through the top 4 reversal price patterns, and how you can use these with your trading to catch big profits!
The patterns I will discuss for you to add to your trading…
- Double Top
- Double Bottom
- Head and shoulders
- Inverted head and shoulders
Even though, these are the basic reversal plays in Forex trading once mastered, they are also some of the most profitable ones.
How to make profits with reversal price patterns in Forex?
When it comes to how to make profits from reversal price patterns in Forex, it all comes down to what the patterns are actually indicating. The patterns that I am now going to cover, will be giving a high probability of a reversal within the markets. Even more importantly they are showing a reversal at the end of a trend.
Therefore stacking the odds in your favour as a trader when using reversal price patterns.
When a reversal formation appears within the charts this in fact means; You are looking for price to move in the opposite direction, from the move that precedes the formation.
As a trader you will need to pay close attention to these formations. As they will be giving you a clue, that the current trend direction may be coming to an end.
Trend Reversal Patterns
So which price patterns appear at the end of a trend and which trend direction?
Now that’s a good question!
When there is a up trend in place the patterns you will want to pay close attention to. Is the double top or the head and shoulders pattern.
These are the two price patterns that will appear at the end of a bullish trend. Catching these reversal here, is going to make you the most profits from the move.
Lets dig deeper into these reversal price patterns in Forex that appear at the end of an up trend. With what these patterns are going to look like and how you should approach trading them.
Bearish Reversal Patterns
These price patterns are classed as a bearish reversal, with turning price at the end of an up trend. One of my favourite reversal price patterns being the double top formation. Is a powerful reversal pattern which is used at the end of an up trending market.
Double Top Formation
The pattern is a very popular price pattern with traders alike. This is mainly because of the high probability of the pattern giving you a great profit potential.
The double top price pattern will form at the top of an up trending market. The pattern will signal normally to traders, the potential trend is coming to an end with a reversal highly imminent.
How does this pattern form?
The double top forms after a retrace within the up trend, which finds buyers creating a support level bounce (called the baseline). Many traders will be buying the market with the assumption of the continuation of the trend.
Most likely using one of the bullish continuation price patterns that you can find in another lessons that I wrote all about how to catch profits using continuation price patterns by clicking here.
As price finds the previous high made, the sellers (or commonly know as supply) reverses the market back down once again. At this point with the pattern, when it is creating the second bounce of the previous resistance. Creates the actual formation of the double top signalling a possible reversal could be imminent.
But… you need to always remember this technical price pattern is never confirmed until the break and close below the baseline. Which was formed from the last bullish move buy the buyers in the up trend.
As on the chart below; you can see how this formation of the double top reversal price pattern would look, and when the pattern is confirmed with the break out.
For a more detailed look into this pattern, you will see on the image below where the blue line is located. This would represent the baseline which is classed as the entry point with a double top pattern.
But as I suggested above, the pattern isn’t actually confirmed until this line has been broken and closed below. This is where many traders will blindly enter the market at this level when not fully understanding the pattern.
In fact you can read more on what is the best solution to trading these technical price patterns so you don’t lose profits and make the same mistakes 90% of other traders make by heading over to a recent article I wrote by clicking here.
Entry criteria for trading the double top
With bearish reversal price patterns, the entry has two potential possibilities that could be applied. The typical entries that a trader could apply when trading this reversal formation is;
- Breakout of the baseline (blue dashed line) with a stop placed above the double top. (this being a more aggressive approach)
- As on the image above, wait for a breakout and retest to catch a entry. (being a more conservative approach)
Personally, when I trade this price pattern I will always go with the conservative approach. This way you are always going to be confirming the pattern with the breakout before you trade it. When it comes to the potential targets with this reversal pattern.
You would look to target the distance from the double top to the baseline, and project this again from the baseline for the target. (know as the measured objective) and, this is how you make profits with reversal price patterns in Forex. Below is another look at what the double top bearish reversal price pattern looks like on a price chart;
The Head and Shoulders Formation
Look:
Just as the double top formation, the head and shoulders formation is classed as a bearish reversal price pattern. It is also a popular reversal price pattern with traders alike.
Why the head and shoulders formation is a popular reversal price pattern?
One of the main reasons you will find the popularity of the head and shoulders price pattern. Is with it being one of the more powerful reversal price patterns a trader can use, with how to make profits with reversal price patterns in Forex markets. It’s a pattern that is only ever used at the end of an up trending market.
The head and shoulders price pattern will form at the top of an up trending market. Similar to the double top formation, that also forms at the top of an up trending market. This pattern will signal to traders, the current trend is coming to an end with a reversal highly imminent.
How does this pattern form?
The head and shoulders price pattern is one of the more technical reversal price patterns you can trade.
The formation consists of four sections within the pattern.
These are;
- Left Shoulder
- Head
- Right Shoulder
- Neckline
The left shoulder and the head, are the makeup of the current up trend. With the right shoulder being the last part of the reversal pattern with a potential entry. Where the neckline is then created just as a double top creates the baseline. Just with the pattern having a second test of the neckline before breaking.
This can been seen in more detail on the image above, how the head and shoulders formation would look. The two shoulders would tend to find the same resistance level or area where sellers (or more commonly know as supply) reverses the market. And the blue line would represent the neckline which is classed as the entry point with a head and shoulders pattern.
Important to remember
Always remember to wait for the break and close of the neckline before confirming this as a valid head and shoulders pattern. Just as the double top reversal price pattern, with the valid close and break of the baseline.
The typical entries that could be used with this reversal price pattern formation-
- Breakout of the neckline (blue line) with a stop placed above the right shoulder top. (this being a more aggressive approach)
- As on the image further above, wait for a breakout and retest to catch a entry, with the stop placed above the neckline. (being a more conservative approach or a second chance entry)
Again just as the double top reversal price pattern, I personally take the more conservative approach. With waiting for the head and shoulders technical price pattern to be confirmed with the break and close of the neckline. When looking for targets with the head and shoulders reversal price pattern.
You are going to use the distance from the head to the neckline, and then project this from the neckline lower for a target, (known as a measured objective). To find out more on measured objectives and how to use them with price patterns, head over to another trading lesson I wrote by clicking here.
Check out below what a head and shoulders reversal price pattern looks like on a price chart…
Now I’ve covered what bearish reversal patterns you will be wanting to trade, with how to make profits from reversal patterns in Forex. I will now go through the opposite price patterns when trading from a bullish reversal aspect at the end of a long term down trending market.
Bullish Reversal Patterns
These price patterns are classed as a bullish reversal, with turning price at the end of a down trend. One of my favourite reversal price patterns being the double bottom formation to catch big profits. Is a powerful reversal pattern which is used at the end of a down trending market.
Double Bottom Formation
Just as the double top pattern, with this being the opposing direction. The double bottom reversal pattern is one of the reversal price patterns, I use very often to capture strong moves in the market.
It’s a powerful reversal pattern used at the end of a down trending market. With the pattern being a very popular price pattern with traders alike.
The double bottom price pattern will form at the bottom of an down trending market. Itis very important to remember where this pattern should form on your charts and never look to trade this pattern unless it is at the bottom of a down trend.
The pattern will signal normally to traders, the potential trend is coming to an end with a reversal to the bullish side which is highly imminent.
How does this pattern form?
Important to remember
The double bottom forms after a retrace within a down trend. This finds sellers creating a resistance bounce (called the baseline).
Many traders will be selling the market with the assumption of the continuation of the trend. Most likely using one of the bearish continuation price patterns that you can find on my trading lessons I wrote by clicking here.
As price finds the previous low made, the buyers (often referred to as demand) reverses the market back up once again. This therefore, creating the second bounce of the previous support being the double bottom formation. As on the image show above, you can see how this formation of the double bottom reversal pattern would look.
The red line would represent the baseline which is classed as the entry point with a double bottom pattern. But, just as I mentioned with the bearish reversals price patterns, you really need to wait for the break and close of the baseline for this pattern to be confirmed! So… always remember you can’t confirm the double bottom until price does break and close the baseline level.
Double bottom entry criteria
With most reversal price patterns, the entry has two potential possibilities that could be applied. The typical entries that could be used with this formation are;
- Breakout of the baseline (red dashed line) with a stop placed below the double bottom. (this being a more aggressive approach)
- As on the image above, wait for a breakout and retest to catch a entry. (being a more conservative approach)
Just as the previous two patterns, I would personally also prefer to trade the conservative approach. With waiting for the retest allows the pattern to be confirmed before an entry.
Now, as like the double top formation the potential targets with this reversal pattern. Would be to look to target the distance from the double bottom to the baseline, and project this again from the baseline for the target. (called a measured objective)
Check out what a double bottom reversal price pattern looks like on a price chart below…
The Inverse Head and Shoulders Formation
(Being a powerful reversal pattern after a down trend)
This bullish reversal price pattern, being another one of my favourite patterns I like to trade. Can capture very large returns when traded correctly. By this, I mean you should only be looking to trade this formation at the end of a long term down trend.
The inverted head and shoulders reversal price pattern is one of the more powerful price patterns a trader can trade when looking to catch the major reversal of the bearish trend.
The inverse head and shoulders price pattern will form at the bottom of an down trending market as price finds a base. When trading this pattern it will signal to you, the current trend is coming to an end with a reversal highly imminent.
How does this pattern form?
The inverse head and shoulders price pattern is one of the more technical reversal price patterns you can trade.
The formation consists of four sections within the pattern.
These are-
- Left Shoulder
- Head
- Right Shoulder
- Neckline
The left shoulder and the head, are the makeup of the current down trend. With the right shoulder being the last part of the reversal pattern with a potential entry. The neckline is then created just as a double bottom creates the baseline. Just with the pattern having a second test of the neckline before breaking.
The two shoulders would tend to find the same support level or area where buyers (or more commonly know as demand) will reverse the market. As on the image above, you can see how this formation of the inverse head and shoulder price reversal would look like.
The red line would represent the neckline which is classed as the entry point with a inverse head and shoulders pattern. But, as usual it is important to remember just as all of the other reversal patterns the inverse head and shoulders is not confirmed until a break and close of the neckline.
To demonstrate this in further detail, see the price chart below showing when a valid break and close of the pattern gives the trader an entry.
Entry criteria
The typical entries that could be used with the inverse head and shoulders formation-
- The breakout of the neckline (red line) with a stop placed below the right shoulder bottom. (this being a more aggressive approach)
- As on the image further above, wait for a breakout and retest to catch a entry, with the stop placed below the neckline. (being a more conservative approach or a second chance entry)
Targets with this reversal pattern, are set by the distance from the head to the neckline, and then projected from the neckline higher for a target. (known as a measured objective). See again what an inverse head and shoulders reversal looks like on a price chart…
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Final thoughts on how to make profits with reversal price patterns?
Now I have gone through all the reversal plays you can use with your trading today, to become a more profitable long term trader. Always remember you need to confirm a technical price pattern such as these reversal plays with the break and close of the baseline or neckline.
With looking to take your trades using the breakout and retest, or the break and close of the price pattern. Before you attempt to trade any setup, this will stop you from being caught in the market with false breakouts.
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