Head & Shoulders Pattern and Double TopsBottoms

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Double Top/Bottom and Head and Shoulders

Video Transcript:

Hello, Traders. Welcome to the third module of the Advanced Technical Analysis course, Chart Patterns. In this lesson, we’re going to review all the intermediate patterns that you are going to find on your charts. These patterns take longer to create than the patterns that we just saw on the previous lessons, but they are much more stronger signals of reversal and continuation. Let’s start with the double top and the double bottom. The double top and the double bottom are strong reversal patterns. The double top is a pattern that is found at the end of an up move. This pattern forms when price attempts to break through a resistance level twice. On both occasions, the resistant level holds, signaling a strong bearish pressure. Once that neckline breaks, a reversal in the trend is in play.

And here’s an example of a double top. In this chart, we are previously on an up move and then we hit this resistance area. The resistance area held and the bears push price down, but price picked up again and tested the resistance area again, but the bears continue to push price down. And once the neckline breaks, we have a full reversal in play and that is what a double top is. The double bottom is the opposite of a double top and is found at the end of a down move. It forms when price attempts to break through a support area twice and, on both occasions, the support level holds because of the strong bullish pressure found there. Once the neckline breaks, a full reversal in the trend is in play. Now, here’s an example of a double bottom.

As you can see, we are in a strong down move, and we tested this area of support and once we correct it here, to this middle point, and retested the area of support again, we can see that the bull pressure overcomes the bear pressure and once the neckline breaks we are actually in a reversal mode and we can go long on this asset. So, basically, double top and double bottom are very easy patterns to spot on your charts and, don’t get me wrong, they do come up, you can find them every day. And they work in the 5-minute chart, in the 4-hour chart, in the daily chart. No matter what chart or what time you’re analyzing, you can always find these patterns and use them to confirm your bias when going long or short on an asset.

Let’s go down to the head and shoulders and the inverted head and shoulders, which are also very strong reversal patterns. The head and shoulders. And this reversal pattern takes longer to form, but it’s one of the strongest reversal patterns you can find. This pattern forms when price makes a new high, then a higher high, and then a lower high, failing to break above. This form, what it looks like, a head with two shoulders in your chart. And when the neckline breaks, we have a full reversal in play. Here’s an example of a head and shoulders. As you can see, we are in an up strong move. We make a new high. Then we make a higher high, and when we trace back in order to make a new high, we fail to break this high and make a lower high that is approximately at the same level as the previous high, making what it looks like, a shoulder, a head, and another shoulder on your chart.

Once the neckline breaks, we are in a full reversal mode. And, as you can see, this actually hits a resistance area, which is a lot larger than the double top area would hit, because we actually failed to break this high and here we break, but we fail to go, to continue with the up move. So, what happens here is that, even though we had a bullish pressure that broke through the resistance area, we failed to break it here, and here we failed to actually continue with the up move. And this is why this is one of the strongest reversal patterns you will find on your charts, and this is also why it takes a lot longer to complete than a double top or a single candles, or a triple candlestick formation, for example.

And the inverted head and shoulders, as you can imagine, is the opposite of the head and shoulders and it’s found at the bottom of a down move. This pattern is a strong bullish reversal pattern and the pattern forms when price makes a new low, then a lower low, and a higher low, making what looks like an upside down head with two shoulders. And here’s how the pattern looks like. In this example, we are in a strong down move and we hit a new low, we correct to the upside and we hit a lower low. When we correct, again, to the upside, we fail to break this low, making a higher low at the same level of the previous shoulder. Once the neckline breaks, we are in full reversal mode and we can go long on this bullish signal.

Again, this is a strong reversal signal that can be found at support zones and end of down trends. And the last intermediate pattern that we are going to review is the cup and handle. And this pattern resembles the shape of a teacup on your chart. This pattern is a continuation, a bullish continuation pattern. This is what the pattern looks like. The upward move has stopped, and price has straightened [SP] forming circular bottom or a circular correction, which is the cup of the formation. After the completion of the rounded correction, a flag forms. You can see her that we are in an up move and here we start to make the rounded correction. The rounded correction ends when we hit this high right here. When we hit this high right here, a flag forms and the flag is the actual handle of the cup.

Once this pattern is complete and the flag breaks, we have a signal to go long on a very strong bullish play. And, of course, this pattern is very easy to spot because it jumps right to your eyes, because it resembles a teacup on your chart, but it takes a lot longer than the head and shoulders to complete, but once it completes, it can be a very strong and very high probability, well, in a very high probability setup for you to trade off. And the risk to reward on all of these patterns is very low. On the next lessons we are going to review how to trade them, how to put your stops, where to put your stops, and where to put your targets and how to calculate your targets with your charts.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

Head & Shoulders Pattern and Double Tops/Bottoms

Good Day Traders,

Kostasze is here.In this article I will explain with screenshots two patterns that I use very often as I am trading. These patterns are Head & Shoulders and Double Tops/Bottoms and they are well known and very popular in binary options technical analysis.Now, it’s time for the first screenshot of the day. It’s from EUR/JPY currency pair in 12/4.

Look at the screenshot. You can see a left shoulder, a head and a right shoulder.I will explain it from the beginning. First of all, as you can easily see we have a resistance in the left shoulder which is near to a whole number and to a daily pivot level,too.After that, the price is moving down and come again to this spot but this time the price breaks the resistance and makes a new higher high and we have now a new resistance.After the reversal the price is moving down again then come back but it stops in the resistance of the right shoulder.This is our spot.You can see that I drew a trend line in the screenshot from the end of the left shoulder to the end of the head.I am waiting for the price to break this trend line after the reversal in the right shoulder and this is a sell signal.Look at the blue box, I have a put arrow when the price breaks this trend line and we should wait for a big movement down.Some traders take their positions in the reversal in the right shoulder, usually with a longer expiry but I don’t do this because I am waiting for the pattern to be ready and I don’t want to chase a pattern.The height of the shoulders should be equal or in many cases the height of the left shoulder is bigger but you should never trust a pattern which has a bigger right shoulder.For the confirmation, you can use RSI, Stochastic.Another popular way to confirm this pattern is the volume.We have usually a bigger volume in the right shoulder , a moderate volume in the head and last a smaller volume in the right shoulder.

Let’s go to the second screenshot from EUR/USD currency pair in 12/4.

Chart Patterns Part 3

Double Top Patterns

Double tops are the same as double bottoms, but are regarded as bearish reversal patterns instead of bullish.

In figure 2.9 below, BJ Services Co. (BJS) was in an up trend from around September 1995 until October 1997. The trend reversal is confirmed by the second top which occurred around April 1998. From April 1998, a downtrend persists until around October of the same year.

Fig 2.9 Click to Enlarge.

Helpful Hints:

  1. Double tops are also sometimes called “M” patterns because of the downswing between the two tops, like in the chart above.
  2. The tops or bottoms don’t have to be at the exact same level. As in the chart above, an approximation is fine.
  3. Two isn’t a magic number. There can be double, triple, even quadruple top/bottom patterns. The more tops or bottoms that form, the stronger the pattern is.

Head and Shoulders Patterns

Like the double top/bottom patterns, the head and shoulders pattern is also a reversal pattern. The head and shoulders pattern is quite well known probably because William Buckley popularized it in his publication, Investor’s Business Daily.

The head and shoulders pattern consists of a left shoulder, a right shoulder, a head and a baseline (also called a “neckline”). Figure 3.0 below is an example in Seitel Inc. (SEI):

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Fig 3.0 Click to Enlarge.

In the case above, the head and shoulders pattern had completely formed by late November 1998. When the price broke below the baseline at the end of November, it was an extremely bearish sign, and the price subsequently broke down.

With all head and shoulder patterns, the moment of potential reversal is when the price breaks through the baseline.

Helpful Hint: The more complex the pattern, the more subjective it can be to identify it. Such is the case with head and shoulders patterns. Some have attempted to assign precise rules to them while others are more lax. Ultimately you will have to decide on your own particular criteria for identifying head and shoulders patterns. Just remember to keep in mind the basic four parts, and you should be fine.

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