Following patterns are related to the reversal pattern:
A. "Hummer", or "Hanging Man"
- The body is situated in the upper (lower) part of the price range. The colour of the body does not matter.
- The lower shadow is twice longer than the body
- A reversal candlestick does not have upper shadow or this shadow is too short
- The longer the lower shadow the shorter the upper one, the bigger the body the more the potential.
- Although the body colour does not matter, but bullish colour of the hummer
- -big bullish potential, bearish colour of the Hanging Man
- -big bearish potential
- In the case if the Hanging Man the confirmation of the bearish signal is very important. The bigger the price gap down between the body of the Hanging Man and opening price for the next day (interval), the bigger the possibility that the Hanging Man will form the top.
- Previous price dynamics characterizes the hummer. If stands before the hummer a candlestick has clearly bearish features (for example, the long body without shadows) - it proves that the bearish market growths in its strength. Then it is necessary to wait for the confirmation that the bulls control the situation), for example, the next candlestick with higher closing price than closing of the hummer. It is important to watch if the hummer breaks the important level of support.
B. "Double top" or "Double bottom"
Reversal models of "Double top" (the change of bullish trend with bearish one) and "Double bottom" (the change of bearish trend with bullish one) forms if the price builds two local extremums, and then breaks the line in its foundation (the line of support in bullish trend or line of resistance in the bearish trend).
The illustration shows usual models of "Double top" and "Double bottom". "double bottom" chart is mirroring of "double top".
This graph lets analytics to expect that after breaking the level of support (in "Double top") or the level of resistance (in "Double bottom") the price may move in the same direction at the distance, that is at least larger than the graph itself (from the foundation to the maximum or to the minimum).
B. "Head & shoulders", or three-way graphs.
The graphs of this class reminds "Double top" or "double bottom". The general rules of its drawdown are the same of those described above with the exception of the fact that the model makes three tops instead of two. We will review only one variant - the change of ascendant trend with descendant, but it means that in "mirroring" everything will be the same in the change of descendent trend with ascendant one.
The model consists of three tops. In the case if two (side) tops are situated at the lower level, and the central top is on the higher one, than this model is called "Head & Shoulders". The same model but with condition that all three tops are at the near levels, then it will be called "Triple top". In case of breaking the foundation of the model the price will (supposedly) move in the direction of this break at the distance no larger than the size of the chart itself (from the foundation to the highest top).