Forex: “Head and Shoulders” and “Triple Top - Triple Base”
The “Head and Shoulders” reversal pattern is the most famous pattern foreshadowing a trend reversal. This model is usually formed at the end of the uptrend and is called the “Head and Shoulders”, and the model that is formed at the end of the downtrend is called the inverted “Head and Shoulders”. The model is characterized by three distinct vertices (or three bottoms, in an inverted figure). The neck line is the trend line that you need to draw to connect the two bases (point B. D) between the vertices (two peaks between the two bases - in the case of the inverted Head and Shoulders model).
In this figure, the left and right shoulder are approximately at the same level. The head is definitely taller than any of the shoulders. The Head and Shoulders model can be considered completed if the closing price is below the neckline. In case of breaking the neck line, you can expect profit equal to the distance from the top of the head (point C) to the neck line. It is also possible to return the price to the neckline, but in most cases, the price, pushing off from the neckline, rushes down.
Features of the figure “Head and Shoulders”:
1. Mandatory presence of a previous uptrend.
2. Immediately after the left shoulder, which will be accompanied by large volumes of transactions, an intermediate decline will follow (point B).
3. Next is the formation of the head of the figure.
4. The top of the head will be followed by a recession (point D), dropping almost to the level of the previous intermediate recession.
5. The right shoulder is accompanied by a significant decrease in volumes, which does not allow him to reach the level of the head.
6. Next is a breakdown of the neckline at the closing price.
7. Price returns to neck level before continuing to decline to new lows.
Breaking the neckline is a signal to open a position. Also a good moment to trade is the price rebound from the neckline, after its breakthrough.
The “Triple Top - Triple Base” reversal pattern is very similar to the “Head and Shoulders” reversal pattern, only in this figure all three vertices are at approximately the same price level.
The Triple Top model can be considered complete if the price overcomes the levels of both recessions. At the time of the breakthrough, volumes increase. The benchmark for making a profit is the height of the peaks, which must be set aside from the breakout point down.
The Triple Base model can be considered complete if the price overcomes the levels of both peaks. The benchmark for profit is the depth of the downturn, which must be postponed from the breakout point up.
As a result of the formation of “triple peaks - triple bases”, a lot of false signals are encountered. Such signals need to be filtered out by analyzing the dynamics of volumes and the convergence or divergence of prices and oscillators.