A number of reversal patterns is distinguished in Forex: Head and Shoulders, Double top, Double bottom, Triple top, Triple bottom, Diamond.
Head and Shoulders
This is a classical reversal pattern of technical analysis, which is formed following to a long upward trend. The model is considered to be fair reliable and is often formed. But despite above-mentioned, many beginning traders do not manage to take profit using this graphic pattern. The reason is that positions are opened prior to forming this model.
Let's figure out the structure of the figure and its formation on the chart of trading terminal. The model consists from three subsequent price extreme points, the middle one is higher than others (head), and the rest two are below the middle one and are roughly equal (shoulders). All three uphills are supported by the neck line.
It is seldom when ideal structure is on the chart and more often we will face below image:
Building rules and trading alerts:
- Head and Shoulders graphic pattern is formed at the end of bullish trend, therefore, it is important to identify the tendency beforehand. By no means should you look for this pattern in flat movement.
- To draw neck line, you need to wait until 1 and 2 points are formed. Only after we will drawn the support and wait for the break up to happen. It is important to account for the incline angle of the neck. It is desirable to have incline into bearish side and the more abrupt it is, the stronger pattern is.
- Break up of neck line shall be confident. Rather often but not always the price can return and test the neck line (retest), which will then perform as resistance line.
- Minimal objective for the profit – is the distance between neck and head laid down from break up point.
Head and Shoulders Bottom
This reversal pattern of technical analysis is formed after a long downward trend. It is totally opposite to Head and Shoulders figure. We will not focus it much, will just show its structure and chart look.
This graphical reversal pattern emerges at the end of bullish trend, when the price faces resistance and makes two subsequent maximum points almost on the same level. In terms of structure it looks as follows:
Rules for building and trading alerts:
- Double top pattern emerges at the end of bullish trend. Originally the price faces a strong resistance level (point 1), then it bounces off a little and again resistance is tested. If resistance is broken up, trend will move higher. But if the next time the price is not able to beat the same level, we will get the second peak (point 2). If the price comes down to support again and break down takes place, we can definitely see that the figure is formed.
- Breaking support level is the selling alert.
- Oftentimes prices retest resistance level, where traders also can find selling alerts for a more beneficial price.
- Minimal objective of profit is to measure distance from resistance line to the supportive line and lay it down to breaking point.
Graphical reversal pattern emerging at the end of bearish trend, when the price meets a strong support and makes two subsequent lowest points almost on the same level. Double bottom has the same principles of building and trading alerts, but they work in opposite directions.
This is a bearish reversal graphical pattern consisting from three almost equal maximum points situated on the same level. This figure is more seldom and represents something middle between Head and Shoulder (three extreme points) and Double Top patterns (equal highest points). In terms of structure it looks as follows:
All principles of building and trading alerts are the same as Head and Shoulders pattern has:
- Triple top pattern emerges at the end of bullish trend, therefore it is important to identify the tendency beforehand. Do not trade it in flat movement.
- The support must be present at least twice.
- Selling signal occurs after support is surely broken up. It is rather often but not always when the price gets back and perform retest.
- Minimal objective for the profit is the distance laid down from break up point.
This is a reversal bullish graphical pattern consisting from three almost equal minumum points situated on the same level. It is easy to guess that it is a reverse Triple Top and is traded in a quite the opposite way.
It is a rare graphical reversal model, which emerges basically on the tops of bullish trend. Diamond consists of two other figures of technical analysis: the first part of the figure represents widening triangle and the second one is symmetrical triangle.
The figure is very much alike the rhomb in appearance. Structure of the pattern shows very well how the price amplitude increases and then it fades. Further this accumulation gives distribution: break up of the price.
- Aggressive signal – the price breaks up narrowing triangle and leaves borders of the model.
- Minimal objective for the profit is the distance equal to height of the figure laid down from break up point.
- Conservative – the price leaves borders of the model and breaks supportive line. In this case, mnimal objective for the profit is the distance laid down from supportive line.
In conclusion we will remind the main rule of trading with reversal patterns and all graph patterns of technical analysis – you for sure need to wait for the final formation of figure.
Confirmation of forming is the confident break up of pattern towards one of the sides.