Head & Shoulders Pattern
For trading the pattern in the Forex market the implications, rules, and strategies work exactly the same for both the bullish and the bearish versions of the pattern, so everything can be used interchangeably only, of course in the opposite direction.
The head and shoulders pattern is formed by three consecutive highs with the middle one being the highest of the 3, hence the resemblance of a head. The highs on each side of the head resemble two shoulders.
Initial Stop-Loss placement:
Price should not return and close back above the neckline of the head and shoulders pattern. If that happens the trade should be closed because the pattern is invalid under those conditions.
Note, however, that price can come back to the neckline, retest it and even trade above it during the session, but it should not close above the neckline.
Here’s an example of an inverted head and shoulders pattern. All the rules, entry points, stop levels and targets can just be mirrored from the classic head and shoulders.
Double Top and Double Bottom Pattern
The double bottom in the bullish case and the double top in the bearish case are classical reversal patterns that can often signal a significant shift in market sentiment, especially when the pattern occurs on a spike in volume and volatility. The pattern is formed by two consecutive equal highs for the double top and two consecutive equal lows for the double bottom pattern.
This pattern also uses a neckline which in a double top is the horizontal line projected from the low (lowest point) between the two tops to the right on the chart.
In a double bottom pattern, the neckline is taken from the high (highest point) between the two bottoms and projected to the right of the chart.
The rules, entry, stop out and target calculating principles work the same for both the bullish double bottom and the bearish double top patterns.
As with most chart patterns, the double top and bottom can be traded with a riskier – higher return approach and a more conservative – lower reward approach.
Here’s an example of the bearish double top pattern. As can be seen, everything works the same as with the bullish double bottom pattern, only in the other direction.
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