Definition
Reversal patterns are chart formations that mark the likely end of the prevailing trend and the start of a move in the opposite direction. An uptrend that produces a reversal pattern is read as transitioning toward decline; a downtrend that produces one is read as transitioning toward an advance. They are one of the two great families of chart patterns, the other being continuation patterns.
Classic examples include the head-and-shoulders, the double top and double bottom, the rounded top and bottom, and the V-pattern. Each describes a recognizable way that the balance of buyers and sellers shifts at the end of a trend.
Why it matters
How it works
A reversal pattern develops as the trend's momentum fades: each successive push makes less progress, sellers and buyers reach a standoff, and the pattern's geometry takes shape. The pattern is considered triggered only when price crosses a key boundary — the neckline of a head-and-shoulders, the valley between two tops, the rim of a rounded formation. That break is the moment the new direction is judged to have begun.
Distinguishing a genuine reversal from a temporary pause is the central difficulty: many formations that look like reversals turn out to be continuation patterns in disguise.