Bearish Reversal Patterns are universal patterns that candlesticks can follow that signify a change from an upwards movement to a downwards movement of share price. Identifying these patterns may help when trying to predict if the stock should be sold, or if there is a good buying opportunity in the future. However, it is important to remember that even though a pattern begins to form, it does not always need to finish. There is no guarantee that a pattern will follow through to the end.
Above is an example of the Head and Shoulders pattern. It can be identified because it looks like the name entails, a head with two shoulders. Some investors like this because it has multiple trading opportunities in the short-term, and a good recovery investment in the long-term. As you can see, there is a dip right after the top of the first "shoulder," which then trends upwards into the "head." Investors like to buy this dip and sell at the top of the "head." After this, some like to buy after the dip following the "head" and sell at the top of the second "shoulder." Finally, they wait for the final dip after the second "shoulder" to find a bottom and buy there, waiting to sell after the share price recovers. To sum up, investors like the Head and Shoulders pattern because it can allow for multiple small, short-term profits as well as a long-term recovery profit.
Now, you hopefully understand how to recognize and read some of the most popular Bearish Reversal Patterns. There are many other Bearish Reversal Patterns you can capitalize on so if you want to look more into this, feel free to research more. Just as another quick reminder, there is no guarantee that a pattern has to finish once it has begun forming. Trading patterns is risky and not always successful for some traders. It is important to understand this risk and do more research into a stock before just buying it for its pattern.
With that being said, here are some of the most popular Bearish Reversal Patterns:
Double Top
Above is an example of the Double Top pattern. Keep in mind, there could be more "tops" other than just two, such as a Triple Top/Multiple Top, so that may affect this pattern. Some investors like this pattern because of its short-term trading opportunity and longer-term relative price. As you can see between the first and second tops, there is a slight dip with a recovery. Many investors like to buy this dip and sell at the recovery on the second top. Other longer-term investors like to buy the dip after the second top. This is because it usually has a low RSI and can allow for lots of profits on a recovery of share price. Overall, the Double Top pattern can help investors profit in the short-run and prepare for the long-run.
Head and Shoulders
Three Black Crows
Above is an example of the Three Black Crows pattern. This pattern can be identified by a consistent upwards trend and then suddenly three consecutive decreasing candlesticks that each have a lower low than the previous. While this pattern may seem simpler than the others, it is a very important pattern every trader should know. In basic terms, this pattern means that there are more sellers than buyers of shares (The sellers are outperforming the buyers). This pattern is liked by investors to help them determine whether or not to sell out of their positions in a trade. Also, it can allow for a later trading opportunity by buying the bottom of the decline. All in all, the Three Black Crows pattern is one of the simplest patterns a trader can learn that can help them both save and earn money.