Level 2: Reading the MarketInteractive
Chart Patterns: Reversal
22 min readUpdated Mar 2026
Quick Check
An inverse head and shoulders signals:
Volume typically should confirm a pattern breakout by:
An inverse head and shoulders signals:
Volume typically should confirm a pattern breakout by:
Reversal patterns form over 10-50+ candles as the dominant side gradually loses control. They signal the current trend is ending and a new one is beginning.
Three peaks where the middle (head) is highest, flanked by two lower peaks (shoulders). The line connecting the pullback lows is the neckline.
Target: Measure head-to-neckline distance. Project downward from break point. Head at $120, neckline at $108, distance = $12. Target = $108 - $12 = $96.
Inverse H&S (bullish): Three troughs with deepest in the middle. Break above neckline confirms reversal upward.
Reliability Factors
Stronger when: (1) right shoulder forms on lower volume than the head, (2) neckline break on above-average volume, (3) clear preceding uptrend of several weeks.
Two failed attempts at the same level signal a reversal.
Target: Distance from peaks (or troughs) to neckline, projected from break point. Triple tops/bottoms (three tests) are rarer but even more reliable.
Double Bottom Trade
Stock falls from $95 to $80, bounces to $88, falls back to $80.50, rises again. When price breaks above $88 (neckline), pattern confirms. Target: $88 + ($88-$80) = $96. Enter $89, stop $79.50. R:R = 0.7:1 risk vs $7 reward.
A gradual U-shaped curve over weeks to months. Price declines, flattens, then curves upward with no sharp reversal point. Large institutions are accumulating during the formation.
Patience Required
Rounding bottoms take weeks to months to form. Not a quick-trade setup. They signal the beginning of a major trend change.
Key Takeaways
Try This
Search your watchlist for a stock that has tested the same resistance twice (potential double top) or same support twice (potential double bottom). Draw the neckline, calculate the target, and set an alert.
Tag reversal pattern setups in your Swingfolio journal and measure their win rate over time.
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This educational content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Trading involves risk of loss. You should consult a qualified financial advisor before making investment decisions. Swingfolio is a trade journaling tool, not a financial advisory service.