Sunday, 6 May 2012
Head And Shoulders, Double Tops And Bottoms, Triple Tops And Bottoms
Head and Shoulders Pattern
The Head and Shoulders pattern is one of the most famous reversal patterns and one that gives a clear signal and entry point. The head and shoulders in an uptrend consists of three relative highs: the first and last peaks are of nearly equal size and are the shoulders of the formation. The middle peak is greater than the other two and forms the head of the pattern. The relative lows in between the head and shoulders form a neckline at the base of the pattern. Once the pattern is completed, the neckline becomes a key support level; the market can bounce off it and reverse, or it can break through it and gather momentum.
Reverse Head and Shoulders
The reverse head and shoulders is the same formation in a downtrending market. The head and shoulders point lower in this case and signal a reversal of the market higher once the price crosses the neckline and closes on a daily chart.
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Double Tops and Bottoms
The double top formation is a straightforward pattern that is easy to recognize on a chart. One of the features of a market in an uptrend is a series of increasing highs and relatively higher lows. If the market on one of its high points fails to break above the previous high, but instead stalls at the same price, this is an indication that the trend is weakening and may reverse. A double top is therefore a simple horizontal line that connects two relative highs at the same price.
The relative low between the two highpoints of the double top creates a miniature version of the neckline in the head and shoulders pattern, and provides traders with a potential entry point to sell. Traders should sell once they receive reasonable confirmation that the neckline has been broken; a good indication of this is when a candle closes beneath the neckline. In the case of the double top, traders can then place an entry order a few points beneath the low of the first candle that closes beneath the neckline.
The double bottom pattern is the inversion of the double top. In a down-trend, the price tested twice the low level but failed to break through, forming a double bottom pattern. Traders can look for opportunities to buy above the neckline once the pattern is confirmed.
Triple Tops and Bottoms
A triple top is the same charting pattern as the double top with an extra relative high that touches the same resistance level. A triple top creates a strong resistance level and a neckline connecting the two relative lows in the middle of the pattern. A trader should enter a short position when the daily candle closes below the neckline of the triple top.
The entry point should be set a few points beneath the low of the candle that first closed below the neckline.
The triple bottom is similarly an extension of the double bottom. It simply contains an additional relative low on the chart that touches the same price as the two that preceded it. The triple bottom is a solid support level and can be a basis for entering a long position if it holds for a third time – particularly if there are additional indicators confirming a reversal at the triple bottom. Alternatively, a more conservative trader could also wait until the price closes above the neckline and buy when the following candle surpasses the high for the first candle. This is essentially the same logic utilized in trading the triple top, whereby traders place short orders to sell an asset at a few points beneath the low of the first candle that closes beneath neckline.
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