Tag Archives: reverse head

How to Trade the Head and Shoulders Pattern 2

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In yesterday’s lesson we looked at the head and shoulders pattern and the reverse head and shoulders pattern; two reversal patterns that you look for at the end of up trends and the end of down trends to signal their reversal. In today’s lesson we are going to look at a specific strategy with entry and exit points for how to trade those chart patterns. So let’s get started.

Let’s start by looking at the strategy for trading the head and shoulders pattern. There’s our head and shoulders pattern that we looked at in the last lesson and the basic strategy here is we’re going trade the break of the neckline. If you remember from our last lesson, once the neckline is broken the pattern is said to be in place. And if you’re looking at an uptrend there and you see that then there’s a good indication there on the break of that neckline and the formation of the head and shoulders pattern that that trend is going to reverse. So we’re going to look to enter short on the break of the neckline.

The target for the trade we are going to get by measuring the distance from the head of the pattern to the neckline, then we’re going to project that down from the break point of the neckline. So after entering the trade on the break, we are going to place our stop-loss just above that right hand shoulder there which is considered the closest resistance.

So, you can see there how we are trading the break of support and then we’re placing our stop-loss just above the nearest resistance level. So let’s look at it here. So we get 430 points by measuring the distance there. We project that downward. After entering on the break, 430 point target there.

We place our stop-loss just above the right hand shoulder. For further confirmation that this is a good trade or a good pattern to enter on, traders are going to look at two things. Firstly, they are going to look for a downward sloping neckline that you can see here.

We have in this pattern as this is further indication that the market is reversing. If that neckline was upward sloping than that would be a sign that this might not be a good pattern to trade this time but since its downward sloping, it looks like it’s a good one to trade.

The second thing they are going to look for is declining volume on each of the rises up. So volume on the head should be lower than volume on the first shoulder. And volume on the right hand shoulder should be lower than the volume going up into the head.

Lastly, traders are going to look for increasing volume on that break of the neckline to verify that that’s a valid break of the support line there. OK, the reverse head and shoulders is basically the mirror image of the opposite of the head and shoulders.

We also are going to get our projected target by measuring the distance from the head to the neckline. We enter on the break there of the resistance this time since we’re flipped upside down.

Project our 610 point target from the break of the resistance line or the neckline there. And then put our stop-loss just above the right hand shoulder there as that is considered the nearest support level.

You can see how that’s sort of a flip or a mirror image of the head and shoulders pattern. Similarly to the head and shoulders pattern, on the reverse head and shoulders pattern traders are going to look for decreasing volume going into the head and then decreasing volume again going into the right hand shoulder.

And this time instead of a downward sloping neckline we are going to look for an upward sloping neckline to indicate and give us further confirmation that the pattern is in place and this might be a good pattern to trade.

Also similarly to the head and shoulders pattern we are going to look for increasing volume on the break of the neckline as further confirmation that that is a true break there. So that’s our lesson for today.

You should have a good understanding of the head and shoulders pattern and the reverse head and shoulders pattern as well as the strategy for trading each of them.

In our next lesson we are going to finish up on reversal patterns by looking at the rising wedge and falling wedge patterns and then we are going to move on to continuation patterns after that.

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The 4th lesson in a series on charting patterns which looks at how to trade the head and shoulders pattern and the reverse had and shoulders pattern for daytraders.

How to Trade the Wedge Chart Pattern Like a Pro

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In our last lesson, we looked at specific strategies for trading the head and shoulders pattern and the reverse head and shoulders pattern, two patterns which can be considered reversal patterns when they show upon a chart. In today’s lesson, we’re going to look at something which is known as the wedge pattern, which is unique in the sense that it can be considered either a reversal or a continuation pattern depending on the shape of the pattern and whether it occurs in an uptrend or a downtrend. So let’s get started.

We’re going to start this one out by looking at the falling wedge pattern which is characterized by a pattern which forms when the market makes lower lows and lower highs, with a contracting range. When you find this pattern in a downtrend it’s considered a reversal pattern as the contraction of the range indicates the downtrend is losing steam. When you find this pattern in an uptrend, it is considered a bullish pattern as the market becomes narrower into the correction, indicating that it is running out of steam and the resumption of the uptrend is in the making.

You see here a chart of the dollar index. And you see the downtrend in place there. You can see the falling wedge in place there. And you can see the two lines, the two trend lines coming together as the pattern or the market continues into the downtrend, indicating a contraction of the range and a potential reversal there — which we did actually get, in this instance.

On the opposite side of that, you see the uptrend on the left hand side of the chart here. You see the falling wedge there. You see the contraction of the trend lines on one another, indicating the correction narrowing into the bottom there and indicating a potential continuation of the uptrend. So the market corrects then turns back around into the original uptrend. So you can see why it’s considered a continuation pattern there.

The rising wedge pattern, on the other hand, is characterizes by a pattern which forms when the market makes higher highs and higher lows with a contracting range. When you find this pattern in an uptrend it’s considered a reversal pattern as the contraction of the range indicates that the uptrend is losing steam. When you find this pattern in a downtrend it’s considered a bullish pattern as the market becomes narrower into the correction, indicating that the correction’s running out of steam, and the resumption of the downtrend is in the making.

See here rising wedge. See the start of the downtrend to the left of that. See the break below in the continuation of the downtrend on that. You see the contraction of the two lines together, two lines coming together there. Contraction of the market trend indicating it’s losing steam or that the correction is losing steam and a resumption of the downtrend.

Here we have the uptrend in place. On the left hand side of the chart we see the rising wedge. At the top of that indicating that uptrend is losing steam. And we see the reversal actually coming into play there, as well on this one.

So that’s our lesson for today. You should now have a good understanding of the falling and rising wedge patterns in situations which they’re considered a reversal pattern and continuation pattern.

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The 5th lesson in a series on charting patterns which goes over the rising and falling wedge patterns.

How to Trade the Head and Shoulders Pattern

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In previous lessons we looked at the double top pattern and the double bottom pattern which are two charting patterns which show that the momentum needed to break a resistance level, if we’re talking about a double top, or a support level, if we’re talking about a double bottom, is not there in the market. Because of this, when these patterns show up on a chart, traders look to trade a reversal of the current trend.

In today’s lesson we’re going to look at two more patterns which also show that the momentum needed to break a resistance level or a support level is not there in the market, which are known as the head and shoulders pattern and the reverse head and shoulders pattern. After we have a good understanding of these two indicators, then we’re going to look at a specific strategy with exact entry and exit points of how you can trade them. So let’s get started.

A head and shoulders pattern is basically defined as one peak in the market followed by a second higher peak in the market followed by a third peak which is lower than the second peak. So let’s take a look at what we’re seeing here on a chart. So you can see here, what forms the first peak is buyers in control drive the market up to a certain level, and then sellers take back control driving the market down which forms the first trough. Buyers then take back control which runs up to the second higher peak which forms the head of the pattern.

Sellers back in control to form the second trough before buyers take back control and form the second shoulder of the pattern which is the third peak. And then the pattern is completed when the neckline is broken which is formed by the two troughs.

The support level for this pattern is the two troughs which are formed between the shoulders and the head of the pattern. So you can see that there. So once that level’s broken that completes the pattern, and the market is theoretically supposed to sell off from there. And you can see why because the markets tried to push up three times, to go higher, and failed. So you can see where sellers will take control there.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern. And, basically, this is defined as one trough in the market followed by a second lower trough followed by a third higher trough. And you can see here the first shoulder being formed by sellers in control driving down into the first shoulder, and then buyers taking back control which forms the first peak of the pattern.

Before sellers take back control forming the head of the pattern. Buyers back in control forming the second peak of the pattern. And then sellers back in control to form the second shoulder of the pattern. And you can see there the neckline being drawn off of the top of the two peaks in between the two shoulders and the head this time.

And traders look for a break of that neckline which confirms the pattern is in place and has completed. OK. So you can see there instead of the resistance levels on the head and shoulders pattern, what is happening here is the market is failing to break support. And so, after it’s failed three times at three different levels, buyers theoretically will be in control for a good portion of the time after that.

So you should now have a good understanding of two more reversal patterns. In the next lesson, we’re going to look at a specific strategy with entry and exit points that traders use to trade these patterns.

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The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use them.