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Bearish Reversal Chart Pattern

Here are two other bearish reversal chart pattern.

Triple Top

triple top 1

The triple top is an extension of the double top. A double top has two highs that are about the same level. The triple top has three highs that are about the same level.

Triple tops are much rarer in occurence. Therefore, we will not focus too much on it. You will find it more profitable to focus on other bearish reversal patterns.

Head and Shoulder

The head and shoulder pattern is just a variation of the triple top. The difference is, the head and shoulders pattern does not have highs that are at the same level.

head and shoulders 6

The head and shoulders looks just like the image of the head and shoulders of a man. The stock price rise to around the left shoulder then drops again before rising again.

The stock forms a higher high but then drops again forming the head. The buyers then pushed the price up again. However, this time the stock cannot make a higher high. The stock stops rising around the price area of the left shoulder. It drops again forming the right shoulder.

A side note: You can make a lot of money when a stock fails to make a higher high. Many traders will look to initiate short positions when they see a stock failing to make a higher high. That is one of the reasons why the head and shoulders pattern works well.

head and shoulders 4

On the above picture, the blueline is the uptrend line and the red line is the head and shoulders neckline. The pattern is completed when the stock price forms the left shoulder, head and right shoulder and then returns to support at the neckline.

How to trade the head and shoulders

head and shoulders 5

Remember, when we talk about entering the stock on bearish patterns, we are actually shorting the stock.

You can enter a trade at 1,2 or 3. Entering at 1 is more agressive while entering at 2 or 3 is less agressive. Chart patterns shows us possible entry areas. But ultimately it is up to traders and investors to choose the exact entry point. This of course, will depend on your experience and skill.

  • There are some people who will not wait for the breaking of a neckline to enter. More experienced traders will begin to enter when they think they have identified the top of the right shoulder. To ensure succeess, other confirmations such as technical signals are needed. Some will, enter on a 50% or 66% rally of the drop from the head. Others will buy when the price level rise to around the price level of the left shoulder.
  • Some traders will enter when the stock price breaks the neckline. It is good to see heavy volume on breaking the neckline. This indicates that the breakdown is genuine and will continue.
  • Others will enter on the return move back to the neckline after the breakdown.
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