Point & Figure Reversal Patterns
A Point & Figure reversal pattern indicates price direction has changed course, from up to down, or down to up. The binary signal is then used by a stock market trader to alter their investment strategy accordingly. For instance, if a stock changed from upward direction to downward, the investor would take profit. Alternatively, a reversal from down to up, an investor would look to buy stock. In short, P&F reversal patterns enable portfolio growth.
Psychology behind P&F reversal patterns
Point and Figure reversal patterns announce that the supply demand relationship has been totally flipped on its head. Traders are convinced the market is breaking out in one direction, only for it to turn on a dime, and move in the opposite direction. Naturally, this action frustrates the inexperienced.
Consequently, portfolio capital erodes fast. Bullish reversal patterns are swift, as are bearish reversal patterns. Traders must be nimble, otherwise losses balloon. Shorts must cover quickly in the case of a bullish reversal. Conversely, losses must be cut on longs when a bearish reversal rears its head. Of course, easier said than done! Often a trader will hold out, allow a loss to run, in the hope that the market turns back in their favor.
However, reversal patterns are relentless. If the market does turn back, it will only do so once all the wrong footed traders have thrown in the towel, and exited at a painful loss. In short, reversal patterns are merciless!
Oxford dictionary definition of reversal:
"a change to an opposite direction, position, or course of action"
The change in trend denoted by a pattern reversal calls for the trader to reverse their course of action. The trader must adapt their mindset and avoid any emotional attachment to the preceding price direction. It is all to easy for a trader to develop a subjective opinion as to where the price should be heading but stubbornness is destructive. The price will take the direction it wants to take regardless of whether it is logical or not.