In the following few pages we show you some basic chart patterns which you can use in your day-to-day forex trading. If correctly identified, chart patterns might lead to huge breakouts and loads of pips for you.
The Head and Shoulders chart pattern is a trend reversal formation. It is most prevalent (and reliable) in uptrends. As the market starts to slow down, and bulls and bears a fighting for dominance, the price forms a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). If you connect the lowest two troughs, a so-called neckline will be formed. It doesn’t have to be horizontal to be called a neckline. Traders frequently have a problem identifying this chart pattern because of inclined necklines. The pattern is complete when the price breaks the neckline, therefore we deem it appropriate to place pending orders to enter the market just below the neckline.
When a currency pair goes through the neckline on negligible volume, you could witness a wave up. Of course, don't take this for an absolute truth; things don't happen by the book sometimes. You could see a fake-out: after the wave up, you could observe the increasing force of mounting selling pressure when the price plummets with greater volume.