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Reversal pattern

A shape that forms at the end of a trend and, when confirmed, suggests direction is turning rather than resuming.

Classic examples are head-and-shoulders, double-top, triple-top, rounding-bottom and island-reversal. Each describes a trend losing its ability to make new extremes, followed by a break of the structure that had been holding.

Reversal patterns are almost always defined with a confirmation level, most often a neckline, and they are not considered complete until that level breaks. Acting before confirmation means guessing at a top or bottom, which is where most of the damage in trading gets done.

Even confirmed, they fail regularly. A failed-pattern frequently produces a violent move the other way, because everyone positioned for the reversal is stopped out at once. Size the trade so that being wrong is survivable rather than assuming the pattern will work.

Related: continuation-pattern, neckline, double-top, failed-pattern, head-and-shoulders

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Head and shoulders topThree peaks, the middle one highest, sitting on a flat neckline that price later falls through.pricetimeLeft shoulderHeadRight shoulderNecklineprice closes back through it
Head and shoulders. Three peaks in a row, the middle one highest, with the two dips between them joined by a line called the neckline. Traders watch for price to close back through that line. Turned upside down the same shape is the inverse head and shoulders.

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