Trend Reversal Patterns in Day Trading: Head and Shoulders, Double Tops, and More
Day trading is a popular investment approach which requires traders to take advantage of short-term market movements. To be successful with day trading, it is imperative to be able to accurately predict major market trends so that you can place your trades accordingly. One of the strategies that is commonly used among day traders is to seek out trend reversal patterns so they can time their trades to take advantage of the reversal that may occur. In this article, we’ll be taking a look at some of the most common trend reversal patterns that traders use when day trading: head and shoulders, double tops, triple tops, and more.
Head and Shoulders Reversal Pattern
The head and shoulders reversal pattern is one of the most reliable trend reversal patterns used by day traders. As the name implies, this pattern resembles a human’s head and shoulders, and it is typically composed of three individual peaks or troughs. The pattern is seen as a clear sign of a potential trend reversal due to the fact that the peaks tend to be higher than their surrounding values, and the depth of the troughs tend to be deeper than their surrounding values.
At the peak of the pattern, the price of the asset typically reaches a high before reversing direction and heading lower. Traders will then look to enter a position when the asset prices reach the trough of the pattern and the trend reverses once again to the upside.
Double and Triple Tops Reversal Pattern
The double and triple tops reversal patterns are very similar to the head and shoulders reversal pattern. However, unlike the head and shoulders pattern, the double and triple tops patterns consist of only two or three peaks respectively. These patterns typically occur when a price has been rising but is then unable to breach a certain level. As such, the price tops out and then reverses direction heading lower.
When trading these two patterns, traders will typically look to enter a position when the price has reached the second or third peak. By doing so, they can take advantage of the reversal that is likely to follow.
Inverted Head and Shoulders Reversal Pattern
The inverted head and shoulders pattern works in the exact same way as the normal head and shoulders pattern, only this time it occurs in a downtrend. That is, instead of three peaks, there are three troughs which indicate the trend is likely to reverse. Traders will then look to enter a position when the asset price reaches the bottom of the third trough and the trend reverses to the upside.
Trend reversal patterns are one of the most commonly used strategies by day traders when trying to time their trades. Knowing how to recognize these patterns can prove to be profitable as it allows traders to take advantage of potential reversals. Some of the most popular trend reversal patterns include the head and shoulders, double and triple tops, and inverted head and shoulders. Each of these patterns carries its own unique set of characteristics, and so it’s important to familiarize yourself with them in order to spot potential reversals.