When searching for reversal patterns, there are a few broad qualities that must be present for a reversal pattern to even be a possibility. These traits must be present for a reversal pattern to even be a possibility. In order for us to have a reversal pattern, it is necessary to assume that there was a previous long-term trend in the first place. Naturally, the longer a trend has been in existence, the more significant the reversal will be. In terms of scope, reversal patterns are considered to be substantial. When we talk about them, we are typically referring about something that has been indicating a shift in course for a number of months, if not for a few years at this point. It is important to keep in mind that a top of a two-week rally would not always be considered a major reversal pattern by a technician.
Look for support and resistance
There is one more traditional component that fits perfectly with a reversal pattern like a glove fits a hand. For this pattern to be considered finished, there must first be a breach of a significant support or resistance level. This is a necessary condition. We might observe a violation of a trend channel or a long-term trend line, but there must also be indications that the existing supply and demand picture for our stock has not only slowed, but that the dominant forces have been actually overtaken.
I’m going to paraphrase another one of Brooks’ truisms here, if you don’t mind. It would appear that “God taketh away far faster than he giveth” applies to our line of work.
It would appear that important patterns, as well as patterns in general, are constructed with tops coming together far more quickly than bottoms. As soon as that upward trend is broken, action needs to be taken pretty swiftly. In the case of significant lows, on the other hand, you’ll find that after a protracted time of drop, investors might not be as quick to reenter the market. This is because major lows tend to be followed by longer periods of decline. If you think it sounds like words of experience, that’s because they are. I’ve been there and completed the task.
When you take into consideration all of the relevant factors, such assertion makes perfect sense. Since we are working with OPM, which stands for “Other People’s Money,” I have the freedom to make rash recommendations such as “get out of a position” or “buy into a bottom.” When it comes to actual cash, though, most people are much more likely to take precautions in order to preserve their wealth as opposed to taking chances with it. It is typical for there to be a period of consolidation following significant market bottoms. This is done so that investors may get confidence that it is now safe to reenter the market. In many instances, we will observe a number of tests of a low point before a reversal begins to take hold. Buyers eventually become bold enough to push prices above a key resistance level after the market has been in a base pattern for some time.
These patterns are produced and can be explained by simply considering the situation to be a never-ending conflict between supply and demand over who will prevail. When we are working with pattern recognition, you will discover that the “bulk” of the data will, in many cases, be the deciding element in your choice. You will learn how to incorporate volume as a confirming signal into your studies. Patterns might look very similar to one another and leave a lot to be desired in terms of their ability to forecast the future.