Level 2 Patterns & indicators · Part 3/9

Reversal Chart Patterns

Reversal formations run for weeks or months. Unlike candlestick patterns, they do not describe a balance of forces but a process: a trend slowly loses the ability to produce new extremes.

Head and shoulders

Head-and-shoulders formation with neckline and downside break
(1) left shoulder, (2) head — the highest high, (3) right shoulder that no longer reaches the head. The dashed neckline connects the intervening lows. (4) Only its break completes the pattern; before that it is just price action with three peaks. The textbook target is the head-to-neckline height projected downward — a rule of thumb, not a forecast.

Three highs, with the middle one the highest. The line that connects the two lows in between is the neckline.

The decisive point is often overlooked: the formation is only complete 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 is the distance from the head to the neckline, projected down from the break. That rule is a convention from the charting tradition, not a measured value. It gives you an order of magnitude, not a forecast.

Inverse head-and-shoulders formation with an upside break
The same formation upside down: (1) left shoulder, (2) head as the lowest low, (3) right shoulder above the head, (4) upside break of the neckline. Bottom reversals typically take longer than tops — panic is fast, confidence rebuilds slowly.

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

Double top and double bottom

Double top: two highs at a similar level followed by a neckline break
(1) and (2) are two highs at nearly the same price — the second attempt fails where the first one did. (3) What matters is not the second peak but the break of the intervening low: only then is the sequence of higher lows broken. Two highs without that break are a pause, not a pattern.

Two highs at roughly the same level. What confirms the formation is not the second high but the break of the low in between – only then is the sequence of higher lows broken.

Double bottom: two lows at a similar level followed by an upside breakout
(1) and (2) mark the same price level twice, and it is not breached again. (3) The bottom is only confirmed once the intervening high is exceeded. The time between the two lows says more than their exact equality: the wider the gap, the more robust the zone.

At a bottom it works the same way. More important than the exact equality of the two extremes is the time between them: two lows a week apart are a detail, while 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

Rounding bottom: a slow turn from falling to rising prices
(1) No single turning point but a gradual rotation: downward pressure fades, price flattens out, recovery starts slowly. (2) Only the break above the rim makes it tradable. Rounding bottoms typically develop over weeks or months — on minute charts you rarely see one without reading it in.

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

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

What reversal formations give you

Three things you can use: a level (the neckline or the extreme in between), a point of refutation (a move back into the formation) and an order of magnitude (the height of the formation).

What they do not give you is a probability. The hit rates published in pattern books come almost entirely from visually selected examples without a clean base rate. How you actually establish such a number 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.