The sideways price action of a reversal pattern signifies that upon breaking out of the pattern there will be a turnaround in the current trend.
We will be investigating the Head and Shoulders and Inverse Head and Shoulders on this page. Double Tops and Bottoms and Triple Tops and Bottoms will be discussed on the next page.
Other reversal patterns such as Rounded Tops and Bottoms, V-Formations, and Diamond Formations are not as common and harder to see. Rounded Tops and Bottoms will be discussed briefly on the next page while you can check our glossary for some information on V-Formations and Diamond Formations.
Head and Shoulders
The Head and Shoulders pattern is one of the most classic patterns in a technical analyst’s toolkit.
This three-peak formation is named for its resemblance to a head and two shoulders. The center peak (head) protrudes above the remaining two peaks (shoulders), which are set at or close to identical levels. The common line of support for all three peaks, which does not have to be a horizontal line, is known as the Neckline. The final downward penetration of the neckline confirms the start of a new downward trend.
Inverse Head and Shoulders
The inverse Head and Shoulder pattern follows the same model.
The neckline holds as support, and the uptrend continues, completing the reversal. You can also see, from the momentum indicator, that selling pressure eases by the time the right shoulder is forming.
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