The charts of any currency price movement with any units of time measurement form periodical and identical patterns of different type. Some of these figures are always formed on the charts before the trend ends, when the operation volume increases or decreases considerably.
The figures Head and Shoulders, Inverted Head and Shoulders, Double Top, Double Bottom, Triple Top and Triple Bottom are called the general reversal figures due to their importance for the market reverses’ forecast.
Head and Shoulders
Head and Shoulders pattern is one of the most reliable and widely-used graphical figures.
It is formed by three successive price rallies. The first and the third rally or the shoulders are almost of the same height. The middle rally is the highest. All three rallies start on the same support line, called the neckline.
Before reaching the point A, the neckline was the resistance line. After having crossed it, it became a strong support line. The price chart retraces from it twice in points В and С. The neckline is finally broken in D point at high trading volume, by which the trend reverse is confirmed. As there was a break through the strong support line, it is natural to prove the neckline (point E), which became a resistance line again. When the resistance is confirmed, the price is likely to fall to the level of F point, the distance to which is called the price target after the end of the figure Head and Shoulders. The price target then is almost equal to the distance from the neckline to the peak (amplitude) of the head. For price estimation, this distance is plotted downwards from the point of the break of the neckline D (line DL)
Buying signals of Head and Shoulders pattern:
Head and Shoulders pattern comprises of the following information:
1. The support line, moving through points В and C.
2. The resistance line. After its formation following the break through point D, the market can test its durability in the point Е.
3. The price direction. When there is no neckline break under the buyer’s pressure in the point Е, the figure contains information, concerning the price chart trend - which will be opposite to the direction of the figure (i.e. bearish).
4. The price target. The figure confirmation points at it (through the break of the neckline amid high trading volume).
One of the main conditions for the correct interpretation of this pattern is the presence of considerable trading volume at the neckline breakthrough. The break, when the volume is not high, is a serious warning, that the downwards break is false and will probably finish in the strong reverse reaction of the price (the rise). The time, used for the formation of this pattern, can be various - from a few weeks to a few months. Such patterns, formed within a day or even an hour and less are not reliable.
Inverted Head and Shoulders
Inverted Head and Shoulders pattern is an inverted reflection of the previous figure. That is why all information concerning the features, possible problems and the signals written above, are true for this figure. It is formed, when the trading currency breaks through the bearish channel. The price chart proves the previous resistance line (uprising line 3), which has turned into a support line. Out of three sequential rises the shoulders (1 and 3) are of about the same height, and the head peak is lower than the shoulders’ peaks. Before reaching point А, the neckline was a support line. After this line breakthrough, it has turned into a reliable resistance line.
The price reverses twice from the neckline - in the points of В and С. The neckline break is likely to be in D point under the conditions of high trading volume. Because of the strong resistance line break, one can assume that until the next reverse, the neckline confirmation will be accomplished (point E) - now it is a support line again. If the support line holds its positions, we can expect the price to rise till the F level, which corresponds to the price target of the Inverted Head and Shoulders pattern. The price target is approximately equal to the amplitude of the head, and is measured from D point of the neckline break upwards.
A Double Top consists of two peaks approximately of the same height. Parallel to the resistance line, which was drawn through two peaks, a line is plotted, which can be considered similar to the neckline of the Head and Shoulders pattern.
The trading signals for the Double Top pattern.
The Double Top pattern includes information about:
1. The support line.
2. The resistance line.
3. The price direction. If the neckline stands the buyer’s pressure, the pattern informs about the further price trend which will be opposite to the peak direction (or bearish).
4. The price targets, framed by the figure confirmation, which, in its turn, is the neckline break at high trading volume.
Like for the Head and Shoulders, the essential condition for the successful formation of the Double Top pattern is the presence of high trading volume at the moment when the neckline is being broken.
The breakthrough at low volume signals the false crossover after which a strong reverse price reaction will follow (uprise). The time of this figure formation can vary from a few weeks to a few months. Such patterns, which were formed within one day (an hour or less), are not reliable. The reliability is higher when formation takes more time. Nevertheless, the price target is not likely to be achieved soon. There are no verified recommendations about this matter, that is why the hypothesis about the terms of the pattern accomplishment should be based on the common sense. It is important to measure the target from the neckline break point, but not from the middle of the pattern, which can be the result of the mechanical continuation the peaks height change.
The Double Bottom pattern mirrors the prior figure. That is why all information, concerning the features and conclusions, written above, is applicable to this pattern. The pit height is almost the same. The neckline is plotted parallel to the line which connects pits’ peaks.
The Triple Top is combined of Head and Shoulders and Double Top patterns. The characteristics and conclusions, written for the Double Top, are true for this one as well. In a classical Triple Top pattern the neckline is parallel to the line, which connects three peak points В, D, and F. Being the support line, the neckline was broken in the point А and turned into a strong support line on the price levels C and Е, and then was broken again in the point G. The support line turned into a strong resistance line, which caused the reverse of the market in the point H. The price target is the level I, which is remote from the neckline over a distance, equal to the middle height of the three pattern peaks, measured from the point D. Like Double Top, it finishes in the point E. The price recoils sharply to the point F. The resistance line is held again and the price steeps to the level of G point. At this level the market pressure causes the support line break. After possible confirmation of the neckline, the price falls again aiming to reach the target.
The Triple Bottom is a hybrid of Double Bottom and Inverted Head and Shoulders patterns. In the Triple bottom the neckline is plotted parallel to the line, which connects three pits (В, D, and F). Being the support line, the neckline is broken in the point А. It turns into a strong resistance line at the level of the prices C and Е, but it is broken in the point G. The resistance line turns into a strong support line which causes a reverse in the point H. The price target is level I, which is remote from the neckline over a distance, equal to the middle height of three pattern pits, measured from the point D.
Round Top, Round Bottom, Saucer, Inverted Saucer
The Round Top, Round Bottom, Saucer, and Inverted Saucer patterns are formed in the result of the moderate and gradual market direction change. These patterns reflect the ambiguity of the market and the end of the trend. The trading activity is low at that moment. And it is almost impossible to define, when this situation will be finished. However, it is known, that the longer the process of these patterns formation is, the higher is the possibility of the abrupt price reverse in the new direction.
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