Top Reversal Patterns For Forex Trading

Reversal patterns provide traders with price levels at which the market can potentially reverse. This, in turn, helps traders enter or exit the market before the trend changes. In this article, we take a look at the top reversal patterns in forex.

 

What is a reversal pattern?

A reversal pattern indicates a change in the existing trend and helps identify when a market is about to reverse. When the market is in an uptrend, a reversal pattern provides price levels to exit or short the trade due to an expected downtrend. During an existing downtrend, traders receive a signal to enter or long the trade due to an expected uptrend.

 

What are the signs of reversal in forex trading?

 

Weak existing trend

When the existing trend is weak, it indicates an expected reversal. A weak uptrend has longer bearish candles than bullish candles and a weak downtrend has longer bullish candles than bearish candles.

 

Closing price

When the bullish candles close near the low price during an uptrend, it signals that the market can reverse anytime due to the losing strength of the uptrend. On the other hand, when the bearish candles close near the high price levels during a downtrend, it depicts an uptrend reversal.

 

Strength of the retracement move

A strong retracement move indicates a stronger chance of reversal. During an uptrend, a retracement move consists of more bearish candles that are larger in size compared to the bullish candles. During a downtrend, a retracement move consists of more bullish candles that are larger in size compared to the bearish candles.

 

Support and resistance levels

When a currency pair is in a downtrend and touches its support level, it indicates a sign of reversal in the market. When the currency pair increases and touches the resistance level, it shows a downtrend reversal.

 

Overbought or oversold market conditions

In an overbought market condition, currency pair trades more than its actual value due to excess demand. In an oversold market condition, a currency pair trades less than its actual value due to excess supply. The market corrects itself in both conditions, indicating a market reversal. An uptrend reversal occurs right after the market is oversold. A downtrend reversal occurs during an overbought market.

 

What happens after a reversal pattern?

After a reversal pattern, the existing trend comes to an end and is followed by an opposite momentum in the market. A downtrend, when reversed, witnesses increasing prices thereafter and an uptrend, when reversed, witnesses decreasing prices thereafter.

 

Top reversal patterns forex traders should know

 

Hammer

Hammer is a bullish reversal candlestick pattern that occurs during a bearish market trend. It consists of a long lower wick and no upper wick, indicating that the low price is being rejected. It occurs after at least three red (bearish) candlesticks and is followed by multiple green (bullish) candlesticks that indicate the market reversing. A hammer chart pattern can be identified when the currency pair trades lower than its opening price but finally closes near the opening price itself. It signals traders to place long orders at a distance equal to the lower wick to reap maximum profits. An inverted hammer is a bearish reversal pattern that occurs during a bullish market trend. It consists of a long upper wick and no lower wick, indicating that the high price is being rejected. It occurs after at least three green candlesticks and is followed by multiple red candlesticks that indicate the market reversing. An inverted hammer pattern can be identified when the currency pair trades more than its opening price but closes near the opening price itself. It signals traders to place short orders at a distance equal to the upper wick’s length to gain from the falling markets.

 

Head and Shoulders

A head and shoulders pattern is a bearish trend reversal that occurs when the market is in an uptrend. It occurs as three different price peaks in the forex market, out of which the middle price peak (high price) is the highest level among the peaks that come before and after it.

• The first peak occurs after the prices continuously rise for some time and fall temporarily.
• The price rises once again, forming a second peak before falling again.
• The last peak occurs after another temporary rise in prices, after which markets continue to fall drastically.

At this point, traders receive a signal to either short or exit the trade. The line that connects the bottom of these three peaks is called the neckline, and as soon as the price touches or crosses this neckline from below, the bearish reversal is confirmed. An inverse head and shoulders pattern occurs during a downtrend and is a bullish reversal signal. In this pattern, the currency pair makes three consecutive lows before finally falling. Out of the three lows, the middle-low (the head) is the lowest, and the two lows before and after (shoulders) are slightly more than the middle-low.

• The first low occurs after the prices continuously fall for some time and rise temporarily.
• The prices fall once again, forming a second low before they rise back up.
• Finally, the last low occurs after another temporary fall, and thereafter the markets continue to rise drastically.

At this point, traders receive a signal to long or enter the trade. The line that connects the tops of these three lows is called the neckline, and as soon as the currency pair price touches or crosses the neckline from above, the bullish reversal is confirmed.

 

Double tops and bottoms

The Double Top pattern is a bearish reversal signal that forms after the currency pair price makes two high tops in the market, with prices decreasing in between the two highs. Both highs are of the same height, and the pattern is confirmed once the currency pair price falls below its support level; that is, when falling prices stop falling, reverse and start increasing. The lowest price between these two high prices is called the trigger line, and when the currency pair price breaks below this line, it indicates traders to short or exit the trade. The Double Bottom pattern is a bullish reversal signal that forms after the currency pair price makes two lower lows in the market, with prices increasing in between the two lows. Both lows are of the same height, and the pattern is confirmed once the currency pair price rises above its resistance level; that is, when rising prices stop rising, reverse and start decreasing. The highest price between these two low prices is called the trigger line, and when the currency pair price breaks above this line, it indicates traders to long or enter the trade.

 

Bullish and bearish engulfing

A Bullish Engulfing pattern is an uptrend reversal pattern that occurs after a downtrend. It consists of a bearish candlestick that is followed by a large-sized bullish candlestick engulfing the bearish candlestick. The bullish candlestick closes above the previous candle’s high price, indicating a bullish reversal confirmation. It provides traders with ideal price levels to long or enter a trade and indicates aggressive behaviour by the currency pair buyers. A Bearish Engulfing pattern is a downtrend reversal pattern that occurs after an uptrend. It consists of a bullish candlestick that is followed by a large-sized bearish candlestick engulfing the bullish candlestick. The bearish candlestick closes below the previous candle’s low price, indicating a bearish reversal confirmation. It provides traders with ideal price levels to short or exit a trade and indicates aggressive behaviour by the currency pair sellers.

 

Doji Candlestick

A Doji candlestick reversal pattern is a bearish or bullish reversal formed when a currency pair's opening and closing price is almost the same. When the Doji candlestick is found at the bottom of a downtrend, it indicates a bullish reversal candle pattern, and when it is found at the top of an uptrend, it indicates a bearish reversal. Bullish reversal candlesticks patterns like Gravestone Doji provide traders with ideal price levels to long a trade, and bearish Doji candlesticks like Dragonfly Doji provide traders with ideal price levels to short the trade.

 

Rising and Falling Wedges

A Rising Wedge is a bullish reversal pattern that occurs during an uptrend. It appears when the currency pair prices are dramatically falling but stop and reverse to an upward direction. The prices point to an immediate wide breakout and contracts as the prices start increasing, confirming the bullish reversal. It provides traders with ideal price levels to long or enter the trade. On the other hand, a Falling Wedge is a bearish reversal pattern that occurs during a downtrend. It appears when the currency pair prices are dramatically increasing but stop and reverse to a downward direction. The prices point to an immediate wide breakdown and contracts as the prices start decreasing, confirming the bearish reverse. It provides the trader with ideal price levels to short or exit the trade.

 

Bearish and Bullish Quasimodo

A Bearish Quasimodo pattern is a bearish trend reversal that appears during an uptrend. It occurs with three peaks, making two higher highs and one lower high, providing traders with an ideal price level to short or exit a trade.

• The first peak takes place after the currency pair prices continuously rise for some time and fall temporarily.
• The second peak, which is the highest of the three peaks, occurs after there is another rise in the prices before the market falls again.
• At last, the third peak takes place, which is near the first peak, before the market reverses in the downtrend for one last time, confirming the bearish reversal.

A Bullish Quasimodo pattern is a bullish trend reversal that appears during a downtrend. It occurs with three troughs or lows, starting with a higher low in the middle preceded and succeeded by lower lows. This pattern provides traders with an ideal rice level to long or enter a trade.

• The first low takes place after the currency pair prices continuously fall for some time and increase temporarily.
• The second low, which is the lowest of the three peaks, occurs after there is another fall in the prices before the market rises again.
• At last, the third peak takes place, which is near the first peak, before the market reverses in the uptrend for one last time, confirming the bullish reversal.

 

Trade the forex market with reversal trends today

Reversal trends provide traders with the opportunity to trade the opposite trends with ideal entry and exit levels. These patterns are reliable as they are confirmed when the existing trends weaken. With our Blueberry, you can start trading forex trading seamlessly. Sign up for a live trading account or try a demo account.