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Trader Q&A: What is the most useful trend reversal pattern?

Schwab’s Trading Services team discusses technical analysis patterns.

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Lee Bohl: I think a head and shoulder top which is a – when it's confirmed its bearish.

Kevin Horner: Once confirmed.

Lee Bohl: That's what I would say. Another couple are–we're talking about tops. A double top but as I said before there are ways to make a double top safer. Right? The first thing that I would look at in a double top is when we run up to the second high. We talked about this earlier in this session. Are we making a higher relative high with our Bollinger band indicator? Another technique I would look at is some oscillator. That’s just a fancy word for looking at momentum. There are different oscillators that you could look up on Google, the RSI, the stochastic oscillator. When we make that second high in a double top is that oscillator not making a second high? You see, we're not making a second high on the oscillator. We're inside the Bollinger band. Those to me would be quite indicative of the top.

Lou Mercer: Are there any divergences that you're looking for or specific trend reversal patterns that you like to use?

Lee Bohl: Well again I like divergences because that's one of the few things I cannot see just looking at price and volume bars. It's very hard to judge looking at a chart momentum. You're making highs but are you making them – it's the second derivative. So are you making highs at the same rate that you were before? And a momentum oscillator can give you some insight into that. So I don't use a lot of indicators. As I said they're mostly derivative of the price and volume so I look mostly at the volume bars and the price bars. But that type of indicator I do look at. You can't see it on the chart.

Kevin Horner: Yeah. I think the reversals are the hardest thing to pick and personally I struggle with them, picking them, being successful with them. So I tend to be more patient, allow it to play out as opposed to waiting and seeing a signal that says hey, this is a reversal. This could be a reversal. It's tough to be right on those so I like to see confirmation myself.

Lee Bohl: The other thing I would look for if you're trying to pick a bottom, you do not have to be totally a hero. Right? You make a low, ok, you go up. Oh I missed it. If you make a higher low significantly and then you make a higher high, ok, you're not getting in at the bottom but you're getting in now – where the odds of the trend are switching. So you don't always have to be the smartest person out there. You can be just follow the arrow and as soon as the arrow makes a higher high and a higher low go with the trend. I know it's very enticing to try to buy the low. They say on the floor of the exchange if you get to buy the low tick once on your life. But that's why I tend to go with the trend more.

Lou Mercer: I love it. Keep your trading questions coming.

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