Trade Reversals & Continuation Patterns

How to Trade Reversals & Continuation Patterns

There are two types of patterns in supply and demand: reversal patterns and continuation patterns.

Reversal patterns are located at the extreme highs and lows where the trend changes direction in the opposite way. These extremes are known as peaks and valleys. They are very strong patterns to trade.

Continuation patterns are formed within the trend. These patterns are usually weak and better trade them near the reversals.

In this chapter, we will learn how to trade these supply and demand patterns and how we can position ourselves to trade in the direction of the trend.

Reversal Patterns

Reversal patterns tend to form at the peaks and valleys of price charts. When the price is over-extended (price running out of steam) with more than 3 consecutive CPs, we could expect a potential trend reversal.

The next example shows a monthly chart with an over-extended price to the upside. The price creates a new higher high on the higher time frame and starts losing strength to keep moving higher.

On the intermediate time frame (weekly chart), price broke the trendline and we wait for the price to create a new fully formed candle below the trendline.

On the lower time frame (daily chart), we wait for the price to create the first continuation pattern to short the market.

We do the same thing for a demand zone, we wait for the price to retrace back up and test the first continuation pattern to go long.

In case the price did not create a CP, we simply trade the extreme peak or valley.

Continuation Patterns

Continuation patterns are good at the beginning of the reversal. After the third CP, we stop trading them because the price is over-extended.

On this chart, the price created a reversal setup, broke the trendline, and created the first continuation pattern. After the third CP is formed, the price started going sideways and reversed back down.

We also don’t trade CPs when price breaks the trendline. If price breaks the trendline, we simply move to the higher time frame to find a fresh zone and wait for the trend to align in all three frames.