In previous idea of continuation pattern, which comprise explanation of some continuation patterns like triangles, flags and pennants it
was stated that in next post I'll be back with patterns such as head & shoulder , double top and bottoms and we're back.
As we have discussed in the previous section, that market can be either in trending phase or in a range-bound
phase. No trend generally lasts forever in the market. After prolonged or medium or shorter duration up and
downtrend, the market often reverses and a move starts in the opposite direction of the prior move. Often we
find that well defined geometrical patterns are formed in the chart which provides good indication of price
reversals. These patterns are called reversal classical chart patterns. When they are formed as a bullish reversal
pattern they are said to be part of accumulation. On the other hand if they are formed at the top of a price
move just before bearish reversal, then they are part of distribution.
However, a geometrically shaped consolidation does not necessarily mean price reversal. Often price resumes
the erstwhile trend post the consolidation move. These are called continuation classical chart pattern. We will
discuss about few of the classical chart patterns in the following section.
-> Head & Shoulder -:
Head and Shoulder pattern is a bearish reversal pattern. This pattern appears after an uptrend. This pattern is
formed with three consecutive tops with middle one being higher than the other two. The middle top is called
the head and the two side peaks are called the shoulders. On joining the intermediate troughs, we get the
neck-line. On ultimate break below the neckline, usually a short trade is taken with a stop-loss above the top
of the nearest shoulder. The target is usually considered as the distance between the neckline and head,
projected from the point of break. If the volume in the down leg of the right shoulder is on the higher side and
break happens with high volume, the conviction is on the higher side for the reversal.
An Inverse Head and Shoulder is just mirror image of the Head and Shoulder pattern. This should appear
after a sustained down trend, the rule of stop loss and target are similar. This often acts as a very effective
bullish reversal pattern.
-> Double Tops and Bottoms -:
These chart patterns are well-known patterns that signal a trend reversal – these are considered to be one of
the most reliable patterns and are commonly used. These patterns are formed after a sustained trend and
signal to chartists that the trend is about to reverse. These patterns are created when price movement tests
support or resistance levels twice and is unable to break through. These patterns are often used to signal
intermediate and long-term trend reversals.
Double top:
Double bottom:
-> Mechanism of Continuation Pattern -:
Continuation patterns provide some logic to the price action. By knowing the patterns, a trader can create a trading plan to take advantage of common patterns. The patterns present trading opportunities that may not be seen using other methods.
Unfortunately, simply because the pattern is called a "continuation pattern" does not mean it is always reliable. A pattern may appear during a trend, but a trend reversal may still occur. It is also quite possible that, once we have drawn the pattern on our charts, the bounds may be slightly penetrated, but a full breakout does not occur. This is called a false breakout and could occur multiple times before the pattern is actually broken and a continuation or a reversal occurs. Rectangles, due to their popularity and easy visibility, are highly susceptible to false breakouts.
Patterns can also be subjective, as what one trader sees is not what another trader sees, or how another trader would draw or define the pattern in real time. This is not necessarily a bad thing, as it can provide traders with a unique perspective on the market. It will require time and practice for the trader to develop his or her skill in finding patterns, drawing them and formulating a plan on how to use them.
My Observation -: These geometrical patterns are formed after a trend in that particular stock, it generally resumes the previous trend after being out of the pattern but some times it reverses the previous trend hence, it is advised to wait for the conformation to play the pattern.
And we can use RSI for conformation i.e. if you are seeing pattern breakout then just check if RSI is greater than 60 and if not than the chances of fakeout is more also in case of breakdown just check if RSI is below 40 else it can reverse.
#Enjoy_trading
was stated that in next post I'll be back with patterns such as head & shoulder , double top and bottoms and we're back.
As we have discussed in the previous section, that market can be either in trending phase or in a range-bound
phase. No trend generally lasts forever in the market. After prolonged or medium or shorter duration up and
downtrend, the market often reverses and a move starts in the opposite direction of the prior move. Often we
find that well defined geometrical patterns are formed in the chart which provides good indication of price
reversals. These patterns are called reversal classical chart patterns. When they are formed as a bullish reversal
pattern they are said to be part of accumulation. On the other hand if they are formed at the top of a price
move just before bearish reversal, then they are part of distribution.
However, a geometrically shaped consolidation does not necessarily mean price reversal. Often price resumes
the erstwhile trend post the consolidation move. These are called continuation classical chart pattern. We will
discuss about few of the classical chart patterns in the following section.
-> Head & Shoulder -:
Head and Shoulder pattern is a bearish reversal pattern. This pattern appears after an uptrend. This pattern is
formed with three consecutive tops with middle one being higher than the other two. The middle top is called
the head and the two side peaks are called the shoulders. On joining the intermediate troughs, we get the
neck-line. On ultimate break below the neckline, usually a short trade is taken with a stop-loss above the top
of the nearest shoulder. The target is usually considered as the distance between the neckline and head,
projected from the point of break. If the volume in the down leg of the right shoulder is on the higher side and
break happens with high volume, the conviction is on the higher side for the reversal.
An Inverse Head and Shoulder is just mirror image of the Head and Shoulder pattern. This should appear
after a sustained down trend, the rule of stop loss and target are similar. This often acts as a very effective
bullish reversal pattern.
-> Double Tops and Bottoms -:
These chart patterns are well-known patterns that signal a trend reversal – these are considered to be one of
the most reliable patterns and are commonly used. These patterns are formed after a sustained trend and
signal to chartists that the trend is about to reverse. These patterns are created when price movement tests
support or resistance levels twice and is unable to break through. These patterns are often used to signal
intermediate and long-term trend reversals.
Double top:
Double bottom:
-> Mechanism of Continuation Pattern -:
Continuation patterns provide some logic to the price action. By knowing the patterns, a trader can create a trading plan to take advantage of common patterns. The patterns present trading opportunities that may not be seen using other methods.
Unfortunately, simply because the pattern is called a "continuation pattern" does not mean it is always reliable. A pattern may appear during a trend, but a trend reversal may still occur. It is also quite possible that, once we have drawn the pattern on our charts, the bounds may be slightly penetrated, but a full breakout does not occur. This is called a false breakout and could occur multiple times before the pattern is actually broken and a continuation or a reversal occurs. Rectangles, due to their popularity and easy visibility, are highly susceptible to false breakouts.
Patterns can also be subjective, as what one trader sees is not what another trader sees, or how another trader would draw or define the pattern in real time. This is not necessarily a bad thing, as it can provide traders with a unique perspective on the market. It will require time and practice for the trader to develop his or her skill in finding patterns, drawing them and formulating a plan on how to use them.
My Observation -: These geometrical patterns are formed after a trend in that particular stock, it generally resumes the previous trend after being out of the pattern but some times it reverses the previous trend hence, it is advised to wait for the conformation to play the pattern.
And we can use RSI for conformation i.e. if you are seeing pattern breakout then just check if RSI is greater than 60 and if not than the chances of fakeout is more also in case of breakdown just check if RSI is below 40 else it can reverse.
#Enjoy_trading
