In my previous post I started talking about chart patterns , so...lets continue a bit.
Head & Shoulders Pattern
Not to confuse with the shampoo – we are still talking about investing, trading, technical analysis which exists a lot due to human nature and psychology. So the next pattern we are looking at is Head & Shoulders pattern.H & S pattern is similar to the tripple top pattern as it also contains 3 tops followed by a downside trend reversal. Only with the difference that the middle top is higher than the shoulders (left and right top). And obviously, not to make the person with the head and shoulders a total freak, we want the shoulders to be at approximately on a same level. H & S bottom is again the opposite to the top, just imagine Keanu Reeves in Matrix to stand on the sealing, head below his feet.
In H & S the line that is drawn to the bottom-peaks (support areas) of the shoulders is called the neckline. Note that sometimes your person on the picture can still become a freak with two about-the-same-height shoulders in one or another side. Quasimodo it is...but as long as you can profit from it, why not.
Note that the pattern formations do not mean that the need to found from the charts as 100% matches. There can be different lower tops or bottoms near the head for example and etc but overally you must be able to separate the shape.
With H & S the minimum reversal objective is to the range from neckline to the head. So once the price as fallen to the neckline then you can expect the price drop (in case of H & S top) as much as the difference between the head and neckline is.
Rounding tops and bottoms
On the charts you might find it when you check if you can form any half-circles of the tops or bottoms. If about a quarter of a full circle is completed you can expect increase in price ( or decrese accordingly ). Note that if at some point the circle is continuing to move in a straight manner then you can expect a reversal trend, often in case of uptrends it pretty much crashes now.
Rectangle tops and bottoms
Rectangle pattern is formed by two horizontal lines that connect a number of highs and lows in about the same price range.Rectangle pattern is often like a sideways movement before the continuation of the primary trend. The rectangle is good in view of seeing the down and upswings above or below the rectangle. If the rectangle formed after a decline and the direction of the breakout is up, it is a rectangle bottom. And vice versa. If there has been two consecutive closes or 5-7% change above or below the rectangle then you should invest your money in the direction of the breakout.
Falling and rising wedges
It’s not very common that you see a wedge on the graph. However, if you do, it’s usually worth noticing. How to notice a wedge? In a rising wedge prices move continuously higher but the trendlines of higher highs and lower lows are narrowing in. In order for the trendlines to be considered there should be at least two upswing highs and downswing lows.
In order to qualify as a reversal pattern there firstly has to be a previous trend to reverse. Wedges are usually long term pattern taking anywhere between couple of months to year to form.
Lets come back to the higher highs and lower lows trendlines – after a while the advances from lower lows become shorter and you can’t call those advances rallies anymore. Once the support line is broken, be prepared for a major downwarns movement. However, before buying be sure to wait until the support line has been broken in a convincing fashion.
Note that it is really difficult to accurately recognize a wedge.
Falling wedge is pretty much the opposite to rising wedge.
Now I could also tell you about triangle tops and bottoms as well as many other different patterns. However, even though I can’t consider myself expert in technical analysis, far from that, I believe that these concepts of price trends etc are getting too far from the basics of price and volume. Thus I won’t be talking about them. I do agree that price and volume are very important in predicting potential price changes. I also agree that there are different patterns that might help us predict the trend or trend reversal on charts. However, we can’t go too far from the basics as the movement of prices is not just a movement of prices, it’s the all about the people causing the prices to change and triangles, pentagrams, whatever else are already unimportant here. Now you should have a basic understanding of patterns and if you think some different pattern types might work for you, you are now able to think up those patterns yourself.