Chart Patterns

Chart patterns can be classified into two categories. One category is considered a reversal chart pattern. A reversal chart pattern gives advance warning about an impending change in trend. The other category is a continuous chart pattern. continuous chart patterns predict that price will resume its previous movement once the continuous pattern is over. A continuous pattern can be considered a pause in price direction, after which the price will resume its movement again.

What does the double top pattern look like?

As this is a reversal pattern that occurs towards the end of an uptrend, there must be an uptrend in place before we can even talk of a double top forming on the chart. A double top pattern consists of two well-defined peaks at approximately the same price. The price will rise to the first peak, then decline to a support level before embarking on another rally to the second peak. As the price is unable to surpass the previous high, it will retreat lower, and once the price breaks the support from the first decline, we will have a break of the support from first decline, we will have a break of the support line. Once the support line is broken, we will have a confirmed double top pattern.

How do you trade this pattern?

This pattern is confirmed once the price breaks below the support (neckline) line. You can wait for the break of support(neckline) to sell. Once the price breaks the support(neckline) you can short the currency pair. If you miss the break, you can wait for a pullback in price back towards the previous support(neckline) line to short. Once you have a short position as the price is not expected to move above the previous support line again, you should place a stop loss just above the previous support line. The price target for this patter is the h eight of the peak to the support line.

What does a double bottom look like?

A double bottom is the direct opposite of a double top pattern. This bottom reversal pattern would occur at the end of a downtrend.

How do you trade this pattern?

Once the price has managed to move above the resistance(neckline) line, you will try to buy into rally. If you miss the first opportunity, a better alternative than chasing the market will be to wait for the pullback to the resistance(neckline) turn-support line. A double loss should be placed below the support line. The calculation of the price target is the same as for a double top pattern

What does a head and shoulders pattern look like?

A head and shoulders pattern, as the name suggests, looks like a human head with shoulder on either side of the head. The first point – the left shoulder-occurs as the price in a rising market hits a high and then falls back. The second point – the head – happens when price rises to a higher high and then fall back again. The third point-the right shoulder – occurs when price rises again but fails to hit the high of the head. Price then falls back again. The shoulders are definitely lower than the head, and in a classic formation, are often roughly equal to one another. The neckline is formed by drawing a line connecting the two low price points of the formation. The neckline can be horizontal or it can slope up or down. Once price breaks the neckline, a head and shoulders pattern is confirmed. This is a top reversing pattern.

How do you trade this pattern?

When the price breaks the neckline, this is the time to short the currency pair. If you miss the first opportunity, you should wait for the price to pull back to the neckline to short the currency pair. When you have a short position, you should place a stop loss just above the neckline, as price should not move above the neckline again. The price objective is a height from the head to the neckline. You should subtract from the neckline the height of the head to the neckline to obtain the price target for this head and shoulders pattern.

What does this pattern look like?

This pattern is actually the inverse of the head and shoulders pattern. This is a bottom-reversing pattern. The neckline can be horizontal of it can slope up or down. Once the price break the neckline, the inverse head and shoulders pattern is confirmed.

How do you trade this pattern?

Trading this pattern is similar to the head and shoulders pattern. You should wait for the price to confirm the pattern when it breaks above the neckline. Once the price breaks the neckline, you should enter into a long position. If you miss this opportunity, wait for the price to pull back to the neckline to enter into long position. You should place a stop loss just below the neckline. Your price-measuring objective is the same as for a head and shoulders pattern.