Once liquidity zones are identified, the next step is to wait for reversal patterns to form, signaling that a breakout could be imminent.
Reversal patterns are price formations that indicate a shift in market sentiment and suggest that the price is likely to change direction, making a breakout more probable.
Common reversal patterns include head and shoulders,
double tops and bottoms, and candlestick formations such as engulfing patterns, doji, or pin bars.
These patterns form when the market has tested the liquidity zone multiple times, and the balance of buying and selling pressure begins to shift.
Head and shoulders patterns, for example, are often seen near liquidity zones, signaling a potential trend reversal.
Similarly, double tops and bottoms indicate that the price has hit the liquidity zone twice but failed to break, showing that the trend may soon change.
Candlestick patterns like an engulfing candle or a pin bar near the liquidity zone can also signal that a reversal is imminent, as they reflect shifts in market sentiment.
It’s essential to analyze these patterns within the context of the larger market trend.
If the reversal pattern aligns with the trend, the breakout’s probability increases. Additionally, ensure that the pattern is confirmed by a shift in momentum, where the price starts moving away from the liquidity zone with strength.
