The Best 12 Reversal Patterns For Option Trading in 2023
Over the past year of option trading, one critical thing I’ve learned is how fundamental and important it is to be familiar with the best reversal chart patterns.
When you employ these reversal chart patterns to your option trading strategy, it can literally make you a lot of money.
- Head and Shoulder Pattern
- Inverted Head and Shoulder Pattern
- Double Top Pattern
- Double Bottom Pattern
- Triple Top Pattern
- Triple Bottom Pattern
- Megaphone Top Pattern
- Megaphone Bottom Pattern
- Diamond Top Pattern
- Diamond Bottom Pattern
- Hammer Candle Pattern
- Inverted Hammer Candle Pattern
First up, we’re exploring the most useful reversal chart patterns that can found in the stock market today, so that your option trading can be more effective in the first place.
1. Head and Shoulder Pattern
The classic Head and Shoulder pattern is chart pattern that has three sharp high points created by three success rallies.
The important element in this pattern is the neckline as it shows support by connecting two low price points.
The Head and Shoulder pattern is a bearish signal, as it indicates a reversal in trend from the current uptrend to a downtrend once it breaks the neckline.
2. Inverted Head and Shoulder Pattern
The opposite of a Head and Shoulder pattern is the Inverted Head and Shoulder Pattern as this is a bullish reversal signal.
The Inverted Head and Shoulder Pattern happens when it has three sharp low points, created by three success reactions in the price, followed by a strong uptrend reversal. The reversal is confirmed when the neckline is also broken.
3. Double Top Pattern
A Double Top pattern is a signal for a bearish reversal from the current uptrend.
A Double Top pattern happens when two sharp peaks around the same price level get rejected. The pattern is confirmed as a bearish reversal when the price action declines below the lowest low of the formation.
4. Double Bottom Pattern
A Double Bottom pattern is a signal for a bullish reversal from the current downtrend.
A Double Bottom pattern happens when two sharp peaks around the same price level rally. The pattern is confirmed as a bullish reversal when the price action rises above the highest high of the formation.
5. Triple Top Pattern
A Triple Top pattern is a signal for a bearish reversal from the current uptrend.
Similar to the Double Top, the Triple Top pattern happens when three sharp peaks around the same price level get rejected. The pattern is confirmed as a bearish reversal when the price action declines below the lowest low of the formation.
6. Triple Bottom Pattern
A Triple Bottom pattern is a signal for a bullish reversal from the current downtrend.
Similar to the Double Bottom, the Triple Bottom pattern happens when three sharp peaks around the same price level get a bounce. The pattern is confirmed as a bullish reversal once the price action rises above the highest high of the formation.
7. Megaphone Top Pattern
A Megaphone Top pattern is a bearish reversal signal. This happens when price action makes a series of higher highs and lower lows after a strong uptrend.
The reversal pattern is confirmed when the price falls below the trend lines.
8. Megaphone Bottom Pattern
A Megaphone Bottom pattern is a bullish reversal signal. This happens when price action makes a series of higher highs and lower lows after a strong downtrend.
The reversal pattern is confirmed when the price rises above the trend lines.
9. Diamond Top Pattern
A Diamond Top pattern is indicates a reversal of the current uptrend to a new downtrend.
A Diamond Top Pattern typically forms over weeks or months after a strong uptrend. It starts to create higher highs and lower lows–like a megaphone pattern–and it then starts to narrow after its high peaks and the low start trending upward.
The reversal is confirmed when the price has broken the trend line patterns of the diamond to the downside.
10. Diamond Bottom Pattern
A Diamond Bottom pattern is indicates a reversal of the current downtrend to a new uptrend.
A Diamond Bottom Pattern typically forms over weeks or months after a strong downtrend. It starts to create higher highs and lower lows–like a megaphone pattern–and it then starts to narrow after its high peaks and the low start trending upward.
The reversal is confirmed when the price has broken the trend line patterns of the diamond to the upside.
Hammer Candle Pattern
A Hammer Candle pattern is indicates a reversal of the current downtrend to a new uptrend.
A Hammer Candle is when a candle closes with a long bottom wick and a small body – also known as The Real Body.
Hammer Candle patterns typically occur from an aggressive downtrend, and the Hammer Candle represents a rebound in the market.
Inverted Hammer Candle Pattern
This type of candle pattern is similar to the Hammer Candle pattern as it indicates a potential reversal from the current downtrend to a new uptrend.
The biggest difference between the Hammer Candle and the Inverted Hammer Candle is that The Real Body is located at the bottom with a long top wick.
