In the centuries that people have been trading and charting, those same people have noticed that the market will repeat itself time and again. By studying these patterns, they were able to ascertain that when X occurs, it’s a smart time to do Y.
Do you know what you’re looking at when you open your charts?
Like their name implies, these patterns suggest that one trend is ending and the market is ready to begin another trend in the opposite direction or, perhaps more likely, move sideways for a while. As with continuation patterns, a trendline is the basic pattern to watch. If prices break through a trendline and then follow through in the same direction, this is the best evidence of a trend reversal. Keep in mind that all chart patterns apply to all trading time frames – daily, weekly, monthly, yearly, hourly or even minute-by-minute bar charts.
Double tops - This phenomenon occurs when prices reach a fresh high, back off from that high, re-test the high and back off again. The longer the time between the “twin peaks” of the highs, the more powerful the chart signal is likely to be. Variations of this pattern that look somewhat similar are called “M” tops or 1-2-3 swing tops, but the second high is usually lower than the first high for these patterns. In all of these cases, the key points are the highs, which mark a barrier that becomes strong resistance, and the interim low. If prices drop below that low, the top is confirmed, and it is signal to sell. Continue reading "Using Chart Patterns to Become a Better Trader"→
One of the oldest and most reliable of all chart formations is the Head and Shoulders Formation. This formation takes place usually after a trend has been established and in place for some time. It can in rarer instances take place in a continuation pattern and still be effective. The two formations we are going to look at today are a Head and Shoulders Top (HAST) and a Head and Shoulders Base (HASB). Both of these formations have a high degree of accuracy and usually portend a major change in direction for a market.
A normal Head and Shoulders Top (HAST) or Head and Shoulders Base (HASB) has a right shoulder, a head, a left shoulder, and a neckline. More complicated formations have double heads or double shoulders and, in some rare instances, triple shoulders. Both a Head and Shoulders Top (HAST) and a Head and Shoulders Base (HASB) have a neckline, and a Head and Shoulders formation should only be considered completed when the neckline is broken.
Once the neckline is broken, it is possible that prices can set back and retest the neckline. It is perfectly normal and healthy for a market to do this. Care must be taken that the retest of the neckline does not exceed by too much the original neckline and thereby abort the formation.
As a general rule, if the market sets back through its neckline and violates the left shoulder formation, it should be viewed as invalidating the original buy or sell signal. In order to predict the extent of a move a measurement is taken from the top part of the head to the neckline. The Head and Shoulders Target Zone (HATSZ) is created when you add or subtract this distance from the neckline, depending on whether it’s a Head and Shoulders Top (HAST) or a Head and Shoulders Base (HASB).
See how many chart formations show up in MarketClub. This type of formation occurs in stocks, futures, forex, metals and mutual fund markets.