Predictions are fundamental in trading. Chart patterns are essential tools to facilitate that by recognizing the impending movements in price. By and large, such commercial indicators can be utilized to purchase or sell stocks whether you’re review bullish or bearish chart patterns. Besides, they enable better planning of entries as well as exits.
Helpful hint: Chart patterns can represent the continuation, bullishness, or bearishness of the existing trend.
Top 3 Bearish Chart Patterns
Among the diverse chart patterns, here are 3 top bearish chart patterns that you should know about:
- Head and Shoulders
- Double Top
- Triple Top
Head and Shoulders Chart Patterns
This is a bearish pattern that denotes a trend turnaround from a bullish trend.
The pattern takes the form of three distinctive peaks or hills when there is an upward trend of stock prices. Out of these three peaks, the one in the center position would be higher than the other two.
Generally, its form is like a person’s head and shoulders. In view of that, the model’s neckline would be created by merging the two armpits. As soon as the pattern is ascertained, price disintegrates from the neckline.
Trading the head and shoulders pattern
It is advantageous for investors to wait for the completion of the pattern. A trader should not presume that a model will be cultivated or that a partly developed pattern will be realized in the future. As the pattern finalizes, a trade can be instigated. Planning the trade is a lucrative tactic, in addition to writing down the stops, entry, and profit targets. Besides that, you need to note any variables that can change your profit target.
The head and shoulders pattern works, in theory, owing to several reasons. For instance, as price declines from the market high, which is the head, sellers have started penetrating the market, and there is reduced aggressive buying. On the other hand, this pattern is not tradable every time. For instance, if there is an extreme drop on one of the shoulders because of an unpredictable event, then the estimated price targets may not be achieved.
This type of pattern specifies a reversal in trend from a bullish to a bearish bias.
It is created from two sequential rounding tops and resembles two unique peaks or hills that are almost equivalent. Also, the formation of this pattern occurs when the stock price is in a substantial uptrend.
Trading double top patterns
Upon confirmation of the pattern, a break-down of prices occurs from the trough created between the two peaks. In many instances, the decline in the price following disintegration from the moderate trough is dependent on the height of the formation. As a result, the bigger the peaks are, the larger the declines. This design is generally found on candlestick charts, line charts, and bar charts.
A double top pattern is an exceptionally bearish technical reversal pattern that is established as soon as the price in assets falls below a support level equivalent to the low in between the two prior levels.
This pattern is a bearish reversal pattern in that the trend moves from a bullish bias to a bearish one.
It appears like three distinct and roughly equivalent highs, resembling peaks (tops) with two troughs in between. As soon as the pattern is confirmed, a break-down in prices ensues, from the trough level created between the three moderate peaks. Generally, there exists a sharp increase in momentum and volume before the break-down occurs.
Trading Triple Top Patterns
Some traders enter into short positions or exit long positions as soon as asset prices fall below pattern support. The pattern’s support level is the latest swing low that follows the second peak, or otherwise, a trader could merge the swing lows between the peaks that have a trendline. The pattern is deemed complete, and a decline in price is expected when the price falls below this trendline.
In addition, traders pay attention to heavy volume as the price drop through the support. This volume is expected to pick up signifying a keen interest in selling. If the volume does not increase, the pattern is rendered more prone to failure.
Bottom Line: There is no ideal pattern as it does not work each time. However, acquiring knowledge of these top 3 bearish patterns can increase your opportunities to attain profits.