Trend reversal patterns

In trading, you can make money on any type of price movement. Most traders prefer to trade on a trend, but how can they determine when the trend will end in order to lock in a profit or make money on it? In such situations, trend reversal patterns come to the aid of traders.

What are reversal patterns

In trading it is important to be able to predict the price movement. One of the most popular ways to do this is technical analysis of crypto. Trend reversal figures are especially important. What are they?

These are graphical reversal patterns that suggest that the trend may change. If the price has been rising for a long time, it may be going down soon. Or vice versa - a prolonged decline will be replaced by growth. Such trend reversal patterns help traders not to enter the market too late, and also to fix profits in time.

The main trend reversal patterns

There are many trend reversal patterns and each trader interprets them differently, but let's look at the most popular ones.

One of the most recognizable and reliable is the head and shoulders reversal pattern. It appears after an uptrend and signals its end. The structure consists of three peaks. First, the left shoulder is formed, then a higher peak “head”, and after that the right shoulder, approximately equal to the first. When the price breaks through the so-called “neck line”, a decline can be expected. This model is considered one of the most accurate in the technical analysis of crypto.

The opposite in meaning is the inverted head and shoulders. It is formed at the bottom of the market and indicates a probable upward reversal. It is a powerful bullish signal, especially when accompanied by an increase in volume on the breakdown of the neckline. Many traders use it in long entry strategies.

Another classic market reversal pattern is a double top. It is formed after price growth and indicates a strong resistance, which the price cannot overcome twice. When a low appears between the tops, and then the price breaks this level down - we can expect a decline. In the context of cryptocurrencies, this often becomes the moment of the beginning of the correction.

Similar to it, but opposite in direction is a double bottom. It appears after a fall in price. Two lows with a short recovery between them show that sellers are losing strength. The breakdown of the level between the troughs signals a possible growth.

Another important pattern is the wedge reversal pattern. It represents a narrowing channel directed against the main trend. For example, if the price was growing and then began to move in a narrow descending wedge - it may be a signal of a soon growth. Here it is important to wait for the price to exit the figure and confirm the volume. This reversal pattern can be either bullish or bearish depending on the context.

The diamond reversal pattern deserves special attention. It is rare, but powerful. It resembles a diamond formed by intersecting trend lines. It usually appears after a strong growth and signals a possible change of direction. It is not easy to recognize, but it often portends a sharp price movement.

Many traders also use candlestick trend reversal patterns. Japanese candlesticks can also be reversal patterns such as the hammer, hanging, engulfment, star and others. These candlestick reversal patterns are especially useful on short timeframes and work well in combination with other tools such as levels and volume. Their strength lies in their simplicity and quick response.

How to recognize patterns on a chart

To look for patterns on a chart, look closely at price behavior and look for patterns. 

Start with a simple one - visual analysis. Pay attention to support and resistance levels. Then look for patterns.

Use thechanalysis indicators. For example, RSI or MACD. They will help confirm signals for reversal.

Want to make it easier? Use bots to analyze charts. They quickly find patterns and implement trading signals.

How to set a stop loss

Knowing the trend reversal patterns is only half the battle. The second, no less important part is proper risk management. And here stop-loss is not the last place. Without it, even the most accurate entry can lead to a loss. Stop-loss protects you from sharp movements, erroneous signals and unpredictability of the market. It is your “insurance” that cannot be ignored.

When a trader finds a reversal pattern, he usually expects a trend change. For example, you have seen a head and shoulders reversal pattern. The price breaks the neckline and you open a short position. Where should you place the stop? Usually just above the right shoulder. This is a logical level, when breaking through which the figure becomes irrelevant. Stop-loss is not just a defense here, but a way to confirm that you were wrong and the market went the other way.

If a double top is formed on the chart, and you decide to sell after breaking the level between the tops, it is better to place the stop a little higher than the second top. This way you will avoid accidental knockout by noise. If the figure does not work, you will exit with minimal loss. And if the movement continues downward, you will stay in the market and make a profit.

In the case of a double bottom, the logic is the same, but in the opposite direction. Buying is carried out after the breakdown of the resistance line between the troughs. The stop is placed just below the second trough. This will give the price space to “breathe”, but will close the position if the market suddenly turns downwards.

The case with a wedge on the chart is more complicated. Such trend reversal figures can be narrow, with sharp jumps. Therefore, it is important not only to place the stop correctly, but also to take into account volatility. Sometimes the stop has to be placed a little farther than usual to avoid accidental knockouts. Especially if the wedge is broken impulsively.

With a diamond reversal pattern, the stop is placed beyond the extreme level of the pattern - depending on the direction of the breakout. This is a rather sharp pattern, so it is important not to miss the moment of exit if the price does not go in your direction. Profit from such movements can be significant, but the risk is also increased, especially without a stop.

A separate approach requires candlestick analysis of reversal patterns. If you trade, say, according to the “takeover” or “hammer” pattern, the stop is placed behind the shadow of the candle. For example, in the case of a hammer at the bottom - under its bottom. In the case of a “bearish engulf” at the top - above the body of the engulfing candle. Such candlestick trend reversal figures work well on short-term trades, where the accuracy of entry and exit is important.

The use of stop loss is not just some formality of trading - it is part of the strategy. If you are working with reversal patterns, you must know in advance where you will exit the trade if you make a mistake. It's discipline, not emotion. And it helps preserve capital in the long run.

Figures give you entry. But only the stop loss determines your protection. It is the foundation of your exit strategy. And most importantly, don't carry stops in the hope of “sitting out” the market. If you are wrong, it is better to exit and reevaluate the situation. One small loss saves you from a big loss. And it gives you a chance to re-enter the market with a more accurate entry and a clear picture.

How to use trading bots

Modern trading has long gone beyond manual trading. More and more traders are turning to automation. This is especially true in the crypto market, where activity does not stop day or night. That is why trading bots are becoming an important assistant for those who use technical analysis of crypto and work with trend reversal patterns.

What are bots capable of doing in technical analysis? First of all, they monitor charts in real time. You no longer need to sit at the monitor around the clock and track hundreds of instruments and their charts yourself. The bot analyzes the price, volumes, indicators and looks for predetermined reversal patterns. If you trade on reversal candlesticks, such as engulfing or hammer patterns, the bot will be able to recognize them instantly. Some platforms allow you to set entry parameters.

When the bot finds the desired signal, it opens a trade immediately. This is especially convenient when working with figures like head and shoulders or double top, where the moment of entry is important. A delay of a couple of minutes and the deal is no longer relevant. A bot reacts faster than a human, without emotions and hesitations.

A significant advantage of bots is that they can work with many pairs and timeframes simultaneously. While you analyze one chart, the bot checks dozens of them. This increases the chance of finding rare trend reversal patterns, such as a diamond reversal pattern or complex patterns like a wedge. 

In addition to searching for patterns, trading bots are able to automatically set stop losses and take profits following preset values. For example, you can set up a strategy so that after breaking the “neck line” in a head and shoulders reversal pattern, the bot itself opens a position, places a protective order and fixes the profit at a pre-calculated level. This removes the emotional burden from the trader and simplifies the decision-making process.

Veles Finance provides built-in indicators of techanalysis, which can be used in conjunction with bots. Thus, you can set additional filters: do not just wait for a reversal pattern to appear, but require that the signal is accompanied, for example, by a crossover of moving averages or RSI exit from the overbought zone. This improves accuracy and reduces the number of false entries.

Nevertheless, bots require monitoring. They should not be started and forgotten. The market is changing, the conditions under which the strategy worked a month ago may be ineffective today. Therefore, even in automatic mode, it is important to regularly check the settings, adapt them and monitor the results.

How to find trend reversal patterns

Now you know what trend reversal patterns are, know how to distinguish them, and understand how to use them in trading. But how do you learn to see them in real time?

Practice, watch the trades of experienced traders. Learn trend reversal patterns from examples on charts and apply other tools of technical analysis of crypto.

And do not forget that one figure is not a full-fledged signal for entry. It requires other confirmations as well. And to speed up/optimize the trading process - use trading bots for chart analysis and automated trading.