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Head and Shoulders Bottom

Head and Shoulder Bottom 头肩底

Summary

Head and shoulders bottom is a classical trend reversal pattern, the shape of the pattern is like two inverted shoulders with a head.

Identify

  1. Formation
    The head-and-shoulders bottom appeared at the end of the bear market, reflecting that the market’s trend had turned from a bear market to a bull market, and the pattern was formed by the left shoulder, bottom, right shoulder, and neckline.
    Price began to fall to a certain low and then rebounded to the resistance level to form the neckline, this price pattern will form the left shoulder; the price then falls from the resistance level and exceeded the low of the left shoulder, and rebound back to the neckline to form the head; after the head was completed, it began to fall for the third time and reach the depth of the left shoulder and began to rebound, forming the right shoulder.
  2. Volume
    The left shoulder normally has the highest volume, the head has relatively lower volume, and the right shoulder has the lowest volume. This phenomenon of diminishing trading volume indicates that when the price falls, the bearish momentum becomes weaker and weaker, which indicates the bearish trend is going to end.

    Left shoulder trading volume: The price continued to fall, and the trading volume was greatly increased and then falls back to form the first peak and valley.
    Head trading volume: Traders who missed the decline in the market, tried to sell and pulled down the price, so the price broke through the first peak and hit a new low, but the volume did not continue to increase. The price pulled back again due to profit taking, forming a second peak, the trading volume decreased, and the head pattern is formed. The volume at the lowest point of the head is significantly lower than that of the left shoulder.
  3. Precautions
    1. The neckline does not have to be parallel, it could be downward or upward sloping.
  4. Application
    1. Selling LevelAfter the head and shoulder bottom pattern is formed, it’s a good time to buy after the price breaks through the neckline.
    2. Take Profit Level
      Draw a vertical line from the lowest point of the head to the neckline, and then measure the same length upwards from the neckline. The length measured from the neckline will be the expected range that the price will rise. Traders can take profit within this range.
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Head and Shoulder Top

Head and Shoulder Top 头肩顶

Summary

Head & Shoulders Top is one of the most common inverted chart patterns. The chart pattern is like a head with two shoulders.

Identify

  1. Formation
    The head-and-shoulder pattern appears at the end of the bear market, reflecting that the market’s trend has turned from a bull market to a bear market. The pattern is composed of the left shoulder, head, right shoulder, and neckline. The price began to rise to a certain height and then fall back to the support level to form the neckline, forming the left shoulder; the price then rose from the support level exceeding the peak of the left shoulder and then fall back to the neckline to form the head; price began to rise for the third time. It reaches the height of the left shoulder and begins to fall for the third time, forming the right shoulder.
  2. Volume
    The left shoulder has the highest volume, the head has a slightly lower volume, and the right shoulder has the lowest volume. The phenomenon of diminishing trading volume indicates that when the price rises, the upwards momentum becomes weaker and weaker, which means that the upward trend is ending.

    Left shoulder trading volume: The price continued to rise with the increasing trading volume, then the price falls back to form the first peak.Head trading volume: Traders who missed the bull market entered here, pushing the price above the first peak and create a new high, but the volume did not continue to rise. The price pulled back again due to the profit-taking from traders, forming a second trough with the decreased trading volume, the head is formed. The volume at the highest point of the head is significantly lower than the left shoulder.Right shoulder trading volume: The price fell back near the support level, and traders buy again at a low level to stimulate the rise, but the bullish sentiment and volume were significantly weaker than the left shoulder and head. The price reaches the first peak and reversed down to the support level (neckline support), the third peak is formed.
  3. Precautions
    1. Generally speaking, the height of the left shoulder and the right shoulder are roughly equal, and the right shoulder usually lower than the left shoulder.
    2. If its neckline slopes downward, it shows that the market is very weak.
    3. The volume of the head and shoulders is often similar, and even there is also situation such as the volume of the head is larger than the left shoulder.
    4. If the volume increases significantly when the price breakout, it shows that the selling momentum of the market is huge, and the price will decline rapidly when the trading volume increase.
    5. After breaking the neckline, occasionally there will be a temporary pullback, but will not exceed the neckline. This situation usually occurs during a breakout of the neckline with low trading volume.
    6. If it falls below the neckline and pulls back beyond the neckline, the head and shoulders pattern is likely to fail and it is not suitable to short.
  4. Application
    1. Selling Level
      When the third peak is formed, the head and shoulders pattern is formed. After the price breaks the neckline, it is a good time to sell.
    2. Take Profit LevelDraw a vertical line from the highest point of the head to the neckline, and then measure the same length down from the neckline. The price measured will be the profit target of this pattern. Traders can consider taking profit within this area.
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Double Bottom

双底 Double Bottom

Summary

Double bottom is one of the common bottom patterns in candlestick charts, its shape is like “W”.

Identify

  1. Formation
    The double bottom consists of two consecutive falling prices and two relatively similar lows, reflecting the change from a bear market to a bull market, and its shape is similar to “W”.A double bottom usually occurs at the end of a market downtrend. After the first bottom, the price will start to rebound. Draw a horizontal line on the peak level formed in the first bottom to form a neckline; The price fell again, but the volume contracted slightly compared to the first peak. After the price fall nearly to the previous bottom, it rebounds upward for the second time and breaks through the horizontal line (neckline or resistance). The price movement is like a “W”, forming a double bottom.
  2. Volume
    During the formation of the double bottom, the volume of the first bottom is higher, and the volume of the second bottom is slightly lower. The volume of transactions showed a diminishing phenomenon, which shows that in the process of the second fall of the price, the selling momentum is weakening, imply that the downtrend is going to end. After the completion of formation, the rising price tends to fall but the momentum is weak, the neckline becomes strong support.
  3. Precautions
    1. Theoretically, the two bottoms’ price levels should be basically the same, but in the actual market, they may not. Generally speaking, the second bottom price level may be slightly higher than the first bottom, which means that during the uptrend retracement, there are sellers trying to further expand the price to fall, but due to the volume is small, the sellers failed and the price turned back up. On the other hand, the second bottom may also be lower than the first bottom, this is mainly due to the downtrend is stronger, so that the buyers are afraid to hold their positions, resulting in buyers’ entry at a lower price level.
    2. When the first bottom is formed, the magnitude of its rebound is about 10%.
    3. When a double bottom pattern is formed, the KD line and RSI often show divergence signals.
    4. During the formation of the double bottoms, trading volume is always high. The volume of these two bottoms will also be sharp and prominent, showing two peaks in the volume indicator. However, the volume at the second bottom shrank significantly compared to the first one, reflecting the weakening of the downward momentum. If the volume at the second bottom increases instead, the double bottom pattern may fail.
    5. The double bottom pattern usually can be determined when two bottoms are formed, and the second bottom trading volume enlarges and effectively breakout the neckline. After that, the price retraces briefly, but the neckline will become its support.
  4. Application
    1. Buying LevelThe buy entry level is at the point where the price breakout the neckline, in this situation the volume needs to be higher at this time. Traders who buy at this point will take a greater risk, this is because of the double bottom breakout fails, the buyer will face a loss at this price. A more conservative way is to wait for the price to breaks the neckline and retrace to the support (neckline), traders can buy if there is a higher volume, the winning rate will be higher.
    2. Take Profit Level
      The take profit target point is the same as the distance from the bottom point to the neckline.
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Double Top

双顶 Double Top

Summary

Double top pattern is one of the common reversal patterns in chart analysis. 

Identify

  1. Formation
    A double top pattern is composed of two similar peaks, and is formed after the price has risen to a certain stage, its shape is similar to the letter “M”. The two peaks are called the left and right peaks. When the price rise continuously, the price will reach a certain level and begin to fall. The first peak forms a lower price level from the downturn, the horizontal line at the reversal level of this downturn is called a neckline; The price rebounds upward again, but the volume contracted slightly compared with the first peak. After rebounding to the previous high, it falls for the second time and breaks through the support of the neckline. The price pattern is like the letter “M”, and the double Top is formed.
  2. Volume
    In the process of formation, the first peak has a higher volume, and the second peak has a slightly lower volume. The trading volume showed a diminishing phenomenon, which indicates that the bullish momentum is getting weaker in the second rebound, and this implies that the upwards trend is ending. After the double top pattern formed, the price will often pull back and break through the neckline, but the movement is weak, and the neckline becomes a strong resistance.
  3. Precautions
    1. Theoretically, the two peaks of the double top should be about the same, but in the actual market, the two peaks are not necessarily at the same height, and a 3% difference is an acceptable range. Generally speaking, the second peak may be slightly higher than the first peak, which means that there are buyers that push the price upwards. However, due to lower transaction volume, buyers failed to push the price above the first peak. If the second peak exceeds 3%, more capital will enter the market, and the double top pattern will evolve into an upward-ranging pattern.
    2. When the first peak is formed, the first low of its fall is about 10%-20% of the first peak.
    3. Sometimes, the double top pattern may not necessarily be a reversal signal. If it does not fall below the neckline for a long time, it may evolve into a consolidation pattern. This can be determined by how long it takes to form the two peaks. The larger the time interval, the higher the effectiveness. Usually, the time interval between the formation of two highs is longer than one month, but if the time interval on the daily chart is longer than half a year, this pattern may fail.
    4. During the formation of a double top pattern, you may observe a higher trading volume. The volume of these two peaks will also be sharp and prominent, forming two peaks in the volume indicator. However, the volume of the second peak contracted significantly compared to the first peak, reflecting the weakening of the buying power of the market. If the second peak volume increases instead, the double top pattern may fail.
    5. A double top pattern usually can be determined when two peaks are formed and the price effectively breaks below the neckline. After that, the price will pull back and a breakout for a short time, but the neckline will become its resistant. At the same time, the pullback does not depend on the trading volume.
  4. Application
    1. Selling Level
      The double top pattern has two selling entry points. The first entry point is the second peak turning point, where most aggressive bear traders enter the market. This is the best selling entry point of a double top, traders who sold here can be called a “precedential trader”. The second selling entry point of a double top pattern when price breakout the neckline. Conservative traders will wait for the price to break the neckline to confirm double top pattern formation. After the price breaks the neckline, it indicates that a larger round of downward trend is coming.
    2. Take Profit Level
      The profit target level will be the distance from the peak to the neckline.