Double Top/Bottom and Head and Shoulders


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Video Transcript:

Hello, Traders. Welcome to the third module of the Advanced Technical Analysis course, Chart Patterns. In this lesson, we’re going to review all the intermediate patterns that you are going to find on your charts. These patterns take longer to create than the patterns that we just saw on the previous lessons, but they are much more stronger signals of reversal and continuation. Let’s start with the double top and the double bottom. The double top and the double bottom are strong reversal patterns. The double top is a pattern that is found at the end of an up move. This pattern forms when price attempts to break through a resistance level twice. On both occasions, the resistant level holds, signaling a strong bearish pressure. Once that neckline breaks, a reversal in the trend is in play.

Double Top and Bottom
And here’s an example of a double top. In this chart, we are previously on an up move and then we hit this resistance area. The resistance area held and the bears push price down, but price picked up again and tested the resistance area again, but the bears continue to push price down. And once the neckline breaks, we have a full reversal in play and that is what a double top is. The double bottom is the opposite of a double top and is found at the end of a down move. It forms when price attempts to break through a support area twice and, on both occasions, the support level holds because of the strong bullish pressure found there. Once the neckline breaks, a full reversal in the trend is in play. Now, here’s an example of a double bottom.

As you can see, we are in a strong down move, and we tested this area of support and once we correct it here, to this middle point, and retested the area of support again, we can see that the bull pressure overcomes the bear pressure and once the neckline breaks we are actually in a reversal mode and we can go long on this asset. So, basically, double top and double bottom are very easy patterns to spot on your charts and, don’t get me wrong, they do come up, you can find them every day. And they work in the 5-minute chart, in the 4-hour chart, in the daily chart. No matter what chart or what time you’re analyzing, you can always find these patterns and use them to confirm your bias when going long or short on an asset.

Let’s go down to the head and shoulders and the inverted head and shoulders, which are also very strong reversal patterns. The head and shoulders. And this reversal pattern takes longer to form, but it’s one of the strongest reversal patterns you can find. This pattern forms when price makes a new high, then a higher high, and then a lower high, failing to break above. This form, what it looks like, a head with two shoulders in your chart. And when the neckline breaks, we have a full reversal in play. Here’s an example of a head and shoulders. As you can see, we are in an up strong move. We make a new high. Then we make a higher high, and when we trace back in order to make a new high, we fail to break this high and make a lower high that is approximately at the same level as the previous high, making what it looks like, a shoulder, a head, and another shoulder on your chart.

Head and Shoulders chart patterns

Once the neckline breaks, we are in a full reversal mode. And, as you can see, this actually hits a resistance area, which is a lot larger than the double top area would hit, because we actually failed to break this high and here we break, but we fail to go, to continue with the up move. So, what happens here is that, even though we had a bullish pressure that broke through the resistance area, we failed to break it here, and here we failed to actually continue with the up move. And this is why this is one of the strongest reversal patterns you will find on your charts, and this is also why it takes a lot longer to complete than a double top or a single candles, or a triple candlestick formation, for example.

And the inverted head and shoulders, as you can imagine, is the opposite of the head and shoulders and it’s found at the bottom of a down move. This pattern is a strong bullish reversal pattern and the pattern forms when price makes a new low, then a lower low, and a higher low, making what looks like an upside down head with two shoulders. And here’s how the pattern looks like. In this example, we are in a strong down move and we hit a new low, we correct to the upside and we hit a lower low. When we correct, again, to the upside, we fail to break this low, making a higher low at the same level of the previous shoulder. Once the neckline breaks, we are in full reversal mode and we can go long on this bullish signal.

Again, this is a strong reversal signal that can be found at support zones and end of down trends. And the last intermediate pattern that we are going to review is the cup and handle. And this pattern resembles the shape of a teacup on your chart. This pattern is a continuation, a bullish continuation pattern. This is what the pattern looks like. The upward move has stopped, and price has straightened [SP] forming circular bottom or a circular correction, which is the cup of the formation. After the completion of the rounded correction, a flag forms. You can see her that we are in an up move and here we start to make the rounded correction. The rounded correction ends when we hit this high right here. When we hit this high right here, a flag forms and the flag is the actual handle of the cup.

Once this pattern is complete and the flag breaks, we have a signal to go long on a very strong bullish play. And, of course, this pattern is very easy to spot because it jumps right to your eyes, because it resembles a teacup on your chart, but it takes a lot longer than the head and shoulders to complete, but once it completes, it can be a very strong and very high probability, well, in a very high probability setup for you to trade off. And the risk to reward on all of these patterns is very low. On the next lessons we are going to review how to trade them, how to put your stops, where to put your stops, and where to put your targets and how to calculate your targets with your charts.

Adam

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