By Taro Hideyoshi
By getting started with reversal patterns, we should start with the most basic patterns because it is easier for you to recognize them in charts. Therefore in previous article, I introduced you to the most basic and well-known reversal patterns; Double Top and Double Bottom.
In this article, I am going to introduce you to another popular reversal patterns among traders; Head-and-Shoulder and Reverse Head-and-Shoulder patterns.
Head-and-Shoulder
The head-and-shoulder pattern shows up less often and also harder to detect than double top.
In an uptrend, the price goes up. Then sellers come in at the highs make the prices slow down and roll over that form the left shoulder (beginning neckline).
Buyers soon return and push the price through the left shoulder’s high which at first glance appears as a bullish new high. However, the new highs are quickly turned back and form the head (continuing neckline).
A trend line for this pattern is drawn from the beginning neckline to the continuing neckline.
Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. Ultimately, buying dries up and the market tests the downsides yet again to form the right shoulder and complete the pattern by breaking the neckline.
The key points
– It indicates that bear is coming
– If the price tumbles through neckline support, it will probably initiate a downtrend.
– If you are holding a long position, cover it now! If you are targeting to open a short position, wait for the price traded below the neckline support to confirm the pattern.
Reverse Head-and shoulder
The reverse head-and-shoulder pattern is a reverse version of head-and-shoulder as its name. Of course, it shows up less often and also harder to detect than double bottom.
The key points
– It indicates that bull is coming
– If the price rises through neckline resistance, it will probably initiate an uptrend.
– If you are holding a short position, cover it now! If you are targeting to open a long position, wait for the price traded above the neckline resistance to confirm the pattern.
In head-and-shoulder & reverse head-and-shoulder pattern, Volume has a great importance.
Generally volume follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers are not as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.
These patterns take trained eyes to detect them. However, with a little practice, you will learn to locate them.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System.
