Chart patterns can mainly be divided into two categories: reversal patterns and continuation patterns. Reversal patterns signal the end of the current trend and indicate a change in direction of the stock price. Continuation patterns signal that the current trend may continue.

Let’s talk about some classic reversal patterns—Head and Shoulders Top/Bottom, Double Top/Bottom, and Rounded Top/Bottom.

Takeaways

• Bearish reversal patterns indicate that a stock price might reverse to the downside. They provide opportunities to short the stock.
• Bullish reversal patterns indicate a reversal to the upside. They provide opportunities to buy the stock.
• You can get alerts on a confirmed pattern, or screen stocks with a formed pattern on Webull.

Bearish reversal patterns

Let’s look at the bearish reversal patterns first. Bearish reversal patterns are formed in an uptrend. They’re confirmed once the support line is breached, signaling that the stock price might reverse to the downside.

Head and shoulders top

The head and shoulders top pattern looks like a human head with shoulders on both sides of the head.

A neckline is drawn by connecting the two low tips in the pattern, serving as the support line.

Double top

A double top pattern is formed when the stock price reaches two consecutive similar peaks in an uptrend, forming an “M” on the chart. The low point between the two peaks is called the “confirmation point”.

The neckline is drawn as a horizontal line passing the point, serving as the support level.

Rounded top

A rounded top pattern is formed when the stock price climbs up gradually, consolidates for a period, and then goes down gradually, forming a dome-shaped pattern on the chart.

In this pattern, the moving average can serve as the support line.

Bullish reversal patterns

Bullish reversal patterns are formed in a downtrend. They’re confirmed once the resistance line is breached, signaling that the stock price might reverse to the downside.

Head and shoulders bottom

The head and shoulders bottom pattern is an upside-down top pattern. A neckline is drawn by connecting the two high tips in the pattern, serving as the resistance line.

Double bottom

A double bottom pattern is an upside-down double top pattern. It is formed when the stock price makes two consecutive similar lows in a downtrend, forming a “W” on the chart.

The high point between the two lows is called the “confirmation point”. The neckline is drawn as a horizontal line passing the point, serving as the resistance level.

Rounded bottom

A rounded bottom pattern is like a bowl. It is formed when the stock price slides gradually, consolidates for a period, and then goes up gradually.

Likewise, a rounded bottom pattern is confirmed when the price climbs above the moving average.

Trading bearish reversal patterns

One way to trade bearish reversal patterns is by opening a short position when the pattern is confirmed (the breakout point). The profit target is often set as the difference between the highest point and the lowest point in the pattern.

In the example below, it’s estimated that the stock price might drop as low as $404,073 - $398,258 (target price).

Trading bullish reversal patterns

In contrast, if you want to trade bullish reversal patterns, you would open a long position when the pattern is confirmed (the breakout point). The profit target is calculated in the same way.

In the example below, it’s estimated that the stock price might rise as high as $66.25 - $67.75.

How do you know when a reversal pattern is confirmed?

Get a heads-up when a pattern is formed by enabling ‘Technical Signals’ in ‘Alert’.

How do you get an automatically calculated profit target on Webull?

A standard head and shoulders pattern is uncommon in the real world, and it might not be easy to calculate the profit target on your own. Enable ‘Technical Signals’ in ‘Chart Toolbox’ > ’Settings’ to read automatic pattern signals on a chart.

How to find stocks with reversal patterns

If you’re eager to trade the reversal patterns but not sure which stock to trade, use our Screener to find one.

*Note: The pattern signals are not 100% accurate. Use other technical analysis methods, such as support and resistance or MA, to confirm a price reversal.

What's More

-Try it out on paper trading 

-Take a quiz to evaluate your technique