Updated: Sep 23, 2018
How great would it be if you could predict a reversal before it happens? you could eliminate losses while simultaneously increasing profits.
We're constantly asked, "how do I spot a reversal in a trend?"
All forex traders have been there, whether a reversal has cost them their profits or losing a neutral position due to a reversal. To be a profitable trader, it is absolutely vital to be able to spot such formations.
Trends could run for a long period of time, however, it is inevitable that they eventually change direction. how can one spot whether its merely a pullback or a complete change in trend.
There are 2 clear formations that will ALWAYS work, spot either of them, and a reversal is most certainly on the cards.
1. Double top/Double bottom
The formation of a double top or double bottom will almost always lead to a reversal in trend. However, a set of criteria have to be met.
Both tops/bottoms peak at a similar point.
The neckline is breached.
They're formed after a clear trend.
Trading double tops/bottoms correctly can be very rewarding and many pips can be caught. lets have a look at how this pattern may look..
As you can see in this example, there is a clear double top and a neckline. But when do I enter?
In many cases, once the neckline is breached, a retest may occur. if this fails, it can be used as an additonal confirmation to sell the currency pair.
But remember if the neckline isn't broker, it isn't a reversal pattern but instead it could just be consolidation.
2. Head & shoulders pattern
Although this pattern may be more rare than the previous pattern, it is arguably the more effective method to predict trend reversal. This pattern is really as the name states, a head and two shoulders. it consists of 3 peaks, two smaller peaks sandwiching a main peak.
This pattern also requires a set of criteria which need to be met for it to become effective and are as follows:
Three peaks, two outer peaks of similar size while the central is larger.
Neckline must also be broken on the end of the third peak.
Only effective in larger chart timeframes
Here's how it looks..