Level 2 Patterns & indicators · Part 3/9

Reversal Chart Patterns

Reversal formations span weeks to months. Unlike candlestick patterns they do not describe a balance of forces but a process: a trend gradually loses the ability to produce new extremes.

Head and shoulders

Three highs, the middle one highest. The line connecting the two intervening lows is the neckline.

The decisive point is often overlooked: the formation is complete only once the neckline breaks. Before that you have price action with three peaks, and that appears constantly in every chart. Trading before the break means trading a guess about an unfinished shape.

The textbook target equals the distance from head to neckline, projected down from the break. That rule is a convention from the charting tradition, not a measured quantity – it gives an order of magnitude, not a forecast.

At a bottom, the same formation inverted. Bottom formations usually need more time than tops: panic is fast, confidence rebuilds slowly. That asymmetry is one of the more robust observations in charting.

Double top and double bottom

Two highs at roughly the same level. The formation is confirmed not by the second high but by the break of the intervening low – only then is the sequence of higher lows violated.

At a bottom, correspondingly. More important than the exact equality of the two extremes is the time between them: two lows a week apart are a detail; two lows two months apart mark a zone that held twice, independently.

Triple formations follow the same logic. They are statistically rarer – not because the market avoids them, but because a zone that has held twice often breaks on the third attempt.

Rounding bottom

Not a turning point but a rotation: downward pressure fades, price flattens out, recovery sets in gradually. The shape becomes tradable only with the break above the rim.

Rounding bottoms need time – typically months. On short timeframes you find them only by reading them in; the shape is smooth enough that almost any price series fits it somewhere.

What reversal formations deliver

Three usable things: a level (the neckline or intervening extreme), a refutation (a return into the formation) and an order of magnitude (the formation height).

What they do not deliver is a probability. The published hit rates in pattern books come almost entirely from visually selected examples without a clean base rate. How such a number is actually established is covered at the end of this level in testing a pattern .

Next

The other side: formations that describe a pause in the trend rather than its end.