Learn · Chapter 04 of 09
Reversal patterns
Reversals mark where a trend exhausts and ownership changes hands. Learn to draw necklines correctly, wait for the retest instead of front-running, and measure realistic targets on NSE stocks.
Core · 4 lessons · 14 min read
Key takeaways
- No prior trend = no reversal pattern, just a range.
- Neckline + successful retest is the trade; the shape alone is homework.
- Measured moves are minimum objectives, not promises — trail beyond them.
Lesson 1
Head and shoulders (and inverse)
- Three peaks with the middle highest; neckline connects the two troughs.
- Valid only after a real prior uptrend — no trend, no reversal.
- Measured move = head-to-neckline distance projected from the breakdown point.
Lesson 2
Double tops and bottoms
- Two tests of the same level with momentum divergence on the second test.
- Neckline break + retest failure is the entry — not the second touch itself.
- On Bank Nifty constituents, round-number levels (₹1,000/₹5,000) strengthen doubles.
Lesson 3
Rounded tops, rounded bottoms and spikes
- Rounding turns show gradual distribution/accumulation — volume dries then expands on resolution.
- Spike (V) reversals on results days need a second-day confirmation; single-day spikes trap.
- Weekly rounded bottoms precede many large-cap multi-month advances.
Lesson 4
Trading the confirmation, not the hope
- Enter on close beyond neckline, or on a failed retest — never mid-pattern.
- Stop goes beyond the pattern extreme (right shoulder / second top), not mid-range.
- Size smaller on first breakdowns into earnings season — false breaks cluster there.
Mistakes that cost money
- Shorting a head-and-shoulders while Nifty itself is in a fresh uptrend.
- Drawing slanted necklines to force a pattern that isn't there.
- Going all-in on the breakdown candle before the daily close.
Chapter FAQ
How reliable is head and shoulders?
One of the more reliable topping structures when it forms after a sustained rally with neckline confirmation — but roughly a third of breakdowns retest the neckline, so waiting for the retest improves entries.
Double top vs range — how to tell?
A double top needs a prior uptrend, weakening momentum on the second test, and a neckline break. Without all three, treat it as a range and trade both sides.
What stop-loss for reversal trades?
Beyond the pattern extreme plus a buffer (1–2% on large-caps, wider on mid-caps). If that stop is unaffordable, the position is too big.
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