What is a reversal pattern in trading?

Essential components of technical analysis, chart patterns make it possible to predict the evolution of the course thanks to the detection of buy or sell signals. Today, we take stock of reversal patterns, which can help detect a reversal of an ongoing trend.

What is a reversal pattern?

As its name suggests, in cryptocurrencies a figure of reversal induces a loss of momentum in progress, before a probable reversal of the trend.

In trading, there are two types of reversal patterns:

  • Upside reversal patterns : which presage the end of a downtrend;
  • Downward reversal patterns that predict the end of an uptrend.

Very important point to remember, a reversal chart pattern can only be validated when the price of the cryptocurrency leaves the pattern. That is, the trend reversal will take place only after the formation of the pattern.

Why spot them for your cryptocurrency trades?

The chartist analysis which consists in identifying and analyzing the different figures increases significantly the probability of a successful trade. Knowing how to recognize reversal patterns makes it possible to detect a trend reversal, find the right timing and define the price objectives to position yourself best in cryptocurrencies.

Pattern detection can provide great help in defining a trading plan in the most rational way possible, i.e. when to buy or sell Bitcoin or altcoins, set relevant course goals or place tight stop orders to limit losses.

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3 examples of reversal figures

Here are three examples of some of the most well-known and used reversal patterns:

1. The bevel (ascending and descending)

A bevel marks the running out of steam in the current trend : bearish in the case of the falling wedge, which portends a rise in the price of a cryptocurrency.

Conversely, a rising wedge portends a downward reversal. The breakout of resistance or support is accompanied by an increase in volumes, which validates the trend reversal.

bevels

Here is an example on the course of Bitcoin:

Examples of ascending and descending wedges -Source: TradingView

2. The double bottom / double top

The double bottom is a bullish chart pattern that takes the shape of a “W” while the double top takes the shape of an “M” and augurs a bearish reversal.

double top double bottom

Double top in “M” and double bottom in “W”

This type of figure appears when the price bounces twice as it approaches a given levelwhich indicates an important support in the case of a double bottom or an important resistance in the case of a double top.

For the figure to be validated, the overcoming of support or resistance must be accompanied by a resurgence in volume.

Examples of double bottom and double top -Source: TradingView

3. The shoulder-head-shoulder

Probably one of the best-known chartist figures! She looks like the triple top (easily recognizable with three peaks reached successively) except that in the case of the “head and shoulders”, the second peak (the head) is higher than the other two (the shoulders).

shoulder-head-shoulder

The shoulder-head-shoulder bodes for a bearish reversal while the “inverted head and shoulders” pattern signals willingness on the part of traders to reverse the price of cryptocurrency upwards.

Example of a shoulder-head-shoulder -Source: TradingView

As we can see on this graph, the validation of the figure has materialized by a powerful bearish reversal. Proof of this is the sinking of key thresholds.

Conclusion

Identify reversal patterns can provide valuable assistance to predict a trend reversal in cryptocurrency prices. Detecting them maximizes the chances of a successful trade. It is therefore an essential tool for getting started in crypto-asset trading.

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