Edition

IFTA JOURNAL
2017 EDITION
Figure 3A. Four line trend reversal patterns
Figure 3C. Four line rounding reversal patterns
It is a typical three line break reversal pattern and is named
a trend reversal because, unlike other patterns, the previous
three lines in this case are in the same direction, so there was
a trend before reversal. It can be understood now that all trend
reversal patterns are change of line formations as well, but not
all change of line formations are trend reversal patterns. Any
pattern where the previous three lines before reversal are not in
the same direction is not a trend reversal pattern.
Pattern 2: Shakeouts
Trends are not linear, and they keep shaking out the weak
traders, even when the overall trend is strong. Figure 3B shows
the shakeout pattern defined as four-line reversal pattern.
Figure 3B. Four line reversal shakeout reversal patterns
It is an extension to trap formation that suggests that some
more “price” is spent in the correction. The name “Rounding”
is given because pattern structure looks like the traditional
rounding formation which has witnessed breakout.
Broadly, two types of price corrections are observed. One is
where consolidating bars will occur, and time is spent without
significant price correction before the resumption of a trend. A
second is where price corrects with or without time correction
before resumption of a trend. Three line break charts will not
move and maintain the “status quo” in the former case. The
latter case will result in “Shakeout” or “Rounding formation”.
Pattern 4: Expanding Formation
This is rather a more interesting product of the line break
charts. Three line break expanding pattern is a complex series
of four lines, as shown in Figure 3D.
Figure 3D. Four line expanding reversal patterns
It is basically a formation of a single line against the trend,
and then resumption of the previous trend. It shakes out
the weak traders, hence the name. The pattern is complete
only when the trend is resumed; hence, a bullish shakeout is
confirmed only when a bullish line is formed, and a bearish
shakeout is confirmed only when a bearish line is formed.
Pattern 3: Rounding Patterns
Price correction in an established trend is an opportunity
for traders when identified. As shown in Figure 3C, two bearish
lines between two bullish lines forms a rounding bottom
pattern, the same way two bullish lines between two bearish
lines form a rounding top.
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