Two Major Reversal Patterns Every Crypto Trader Must Understand

Before entering the crypto market, I believe every trader should understand the underlying logic of price movements. The market won’t change direction because of your expectations; only by understanding the essence of trends can you stay rational amid fluctuations.

The Iron Law of Market Movement

First, it must be clear: The market is always right. When your analysis contradicts the price trend, the only possibility is that you are wrong. This is not a discouragement but the most important mindset adjustment in trading.

Market movements have strong inertia. Once a clear trend is formed, most reversal patterns will fail, at most resulting in sideways consolidation. Only a rare breakout against the trend can truly change the existing trend. This reality causes many retail traders to suffer heavy losses in extreme market conditions.

Peak Reversal: A Signal of Extreme Emotions

Peak reversal reflects extreme greed or extreme panic in the market. This pattern is difficult to use for entry trading but is crucial for managing existing orders.

Movement Characteristics

Peak reversals usually manifest as:

• Accelerated Rise: The slope of the trend channel line steepens, and candlesticks grow longer
• Extreme Unilateralism: Consecutive strong bullish candles with hardly any pullbacks
• Emotion-Driven: Participants frantically chase in, fearing missing out on gains

This phenomenon is especially typical in commodity markets. Greedy participants believe prices won’t offer better entry points, so they buy at market at all costs.

FIL Case Deep Dive

Taking FIL as an example, this is the most intuitive illustration of a peak reversal.

Starting from a low of $20, FIL experienced a long-term upward trend. When the price accelerated upward, traders’ emotions were already very eager. Long bullish candles broke through short-term channels, indicating the market was overbought.

Strong traders and institutions faced a choice: they had already accumulated positions at lower levels and should start taking profits. They knew that most retail traders had already entered, with no new buying support. Those driven by extreme greed, seeing the rapid rise in candles, only had “missed the opportunity” fear in their minds, ignoring potential risks.

When FIL approached around $170, the trend began to show subtle changes. Institutional investors started to take profits gradually, some even began shorting in batches. Traders holding short positions at high levels were already desperate, closing positions at market to cut losses.

The price eventually surged toward $200. At this point, market sentiment was at its craziest—and most dangerous. Latecomers who chased in between $170 and $200 only stayed in this zone for a few hours.

Then, the reversal came swiftly and thoroughly. Institutions heavily shorted, and the bears’ strength instantly overwhelmed the bulls. The price started to decline sharply over one or two waves, or even more. This is a typical peak reversal trend dump.

BTC Case Validation

Bitcoin’s historical movements repeatedly confirm this pattern.

When BTC breaks through a channel line, subsequent rises accelerate. Consecutive bullish candles grow longer, signaling clear peak emotions. Then, the price reverses rapidly, dropping sharply.

Even if the price falls to levels where bulls are willing to re-enter, it often fails to break previous highs upon testing. Once a new consolidation zone (converging pattern) forms and breaks downward, the entire trend will reverse thoroughly.

Secondary Test of Peak Reversal

Peak reversals can also undergo a secondary test, but the test amplitude is usually very small, almost negligible.

For example, during BTC’s panic sell-off at 312, the price plummeted to over $3,000 but did not significantly retest that bottom. The downward wave tested the bottom but with a very small amplitude. Such micro double bottoms are more obvious on small timeframes but less so on long-term charts.

Peak Reversal at Different Positions

Peak reversals not only occur in main trends but also appear at support/resistance levels, trendlines, and channel lines. Regardless of where they occur, their essence is the same: the last extreme expression before exhaustion of momentum.

Terminal Flag: A Warning of Trend Energy Deterioration

The terminal flag is a correction pattern that appears at the end of a trend. This concept seems simple but actually reveals the entire process of trend weakening.

Definition and Characteristics

The core feature of a terminal flag is: Rapid move - channel correction - rapid move again. This “fast-slow-fast” rhythm pattern is a reflection of exhausted momentum.

After a strong trend, a correction often occurs, and subsequent continuation waves tend to be weaker. Common phenomena include:

• Fake breakouts (breaking previous highs then quickly falling back)
• Lack of continuation (decline fails to test prior extreme levels)
• Horizontal consolidation (forming a trading range rather than a clear trend)

Seemingly Contradictory Conclusions

Interestingly, according to this definition, all trend reversals should include a terminal flag. This is no coincidence—because any developing trend will experience pullbacks, and these pullbacks can all be called terminal flags.

This indicates that the essence of a terminal flag is: a false breakout of the trend direction.

Why Do Fake Breakouts Occur?

In a healthy trend, many traders will enter on a breakout. But when the breakout fails, these participants stop following and instead close their positions. As a result, trend energy weakens, leading to deep pullbacks, trading ranges, or even complete reversals.

“Breakout top reversal” and “breakout bottom reversal” are standard terminal flag reversal patterns.

Practical Trading Application

For novice traders, I do not recommend directly trying this strategy because it is very difficult to master. But understanding the true meaning of terminal flags is about: accepting multiple interpretations of price movements.

When you see a range breakout followed by a false breakout and pullback, don’t be confused. This precisely indicates that the previous trend is losing support. Adjust your market view promptly, manage your orders well, and avoid large losses.

The True Purpose of Learning These Two Patterns

Mastering peak reversals and terminal flags is not for precise prediction but to:

1. Understand the logic of price movements, rather than being driven by emotions
2. Warn of risks, avoiding chasing highs and selling lows in extreme conditions
3. Manage orders, using partial profit-taking instead of full liquidation
4. Adjust promptly, reacting quickly when the trend shows signs of trouble

The market is always teaching those traders who do not respect it. I believe that true success comes from understanding rather than guessing, from discipline rather than luck.

Whether it’s a peak reversal or a terminal flag, the core points to the same truth: The market is always expressing its true intent; the key is whether you can read this language.