When it comes to trading there are many different patterns that can be spotted when we look into the different behaviors of the lines on the graphs. The analysis and determination of different patterns are crucial for the recognition of patterns and the estimation of the possible changes in the values in the market; also these can be used to assess the possible risks and amounts of income or profit.
One of the patterns that are used to see into this are head and shoulder since it looks like this part of the human body; there are two types, regular one and the reverse one; both giving valuable information about the values and the changes of them, as well as the prediction of changes in the future.
Definition of the pattern
When it comes to pattern recognition one of the most recognizable is the one that when looked at seems like there is a human torso there; the graph looks like there are two lower peaks and one very high peak in the middle.
How is this defined? Head and shoulders graph refers to the graphic representation of the specific pattern which can assist the ones that are trading to sport when a reversal is close after there was a trend that started to fall down.
These reversals are common for the end of this trend of increase. Even though there are a lot of ups and downs these are minor, and it is essential to look at the longer periods of time to spot the patterns.
Defining inverse pattern
Like everything in nature, there is always the opposite; as stated above, the head and shoulders pattern exists, and as we can see it is very important for the traders. The reverse or inverse pattern is as important as that one. When it comes to the looks of it, as the name suggests, it looks like the mirror image of the regular pattern. Meaning where there are ups on the regular one, reverse shows downs, and vice versa.
What can this graph show us? It indicates that there is a downward spiral, but the reversal of it will be indicated as the deeper decreases on the graph. Once you look at the graph, it is very obvious what we are talking about; there is a decrease with the maximum of decrease, then an increase, then a very deep and long decrease followed by the increase, and lastly a small decrease followed again by the increase. This makes a picture of the shoulder with the head in between.
Identification
Now that you know what these are, it is important to know how to recognize it on time in order to use it at your advantage. There are a few tricks that you may use in order to detect it.
Firstly, it is essential to determine the trends that do exist on the market; this can be done by using available information such as prices and their behavior, as well as some indicators that can help you in this; one of the things that can be identified is so-called preceding uptrend.
Once you have done this, it is time to see the graph and analyze it. By doing analysis you will extract information and be able to spot the pattern you are seeking. Keep an eye in the “head”, and locate the possible heads and search for the “shoulders” that should reside next to it.
Lastly, when all of the above is done, find the neckline; this is a line that will connect the two shoulders and this the line tends to be horizontal.
When it comes to the so-called technical trading, there are a few ways that this can be done. One of them is Fibonacci analysis, which is based on the Fibonacci sequence and its pattern of increase. If you are interested in the way it works, we recommend you to take a few moments and read the explanation on orbex.com.
Advantages
There are a few advantages of using these mentioned patterns; the first and most obvious one is that due to its very specific visual representation of it can be easy to spot for the trained eye. This is one of the skills that will get better the more you practice, and once you have learned how to spot a pattern it can be easy to keep on using the knowledge and continue to use and improve it.
Usage of it has risks that are defined and well and known to take profits. This means that you can assume the results very accurately and estimate the risks. By having this info, you will be able to act upon it on time and in proper ways in order to get the most profit.
This has very big potential in the very complex and digs markets, since the more data you have, the best you will act on in. It is essential to state that this can be used in all markets since they all do have their ups and downs and all the data can be collected, laid out, and analyzed.
Limitations
Like any method, there is, this one has its limitations, and it is essential to vocalize them since they can help you in getting proper information about the market and assess the trading for later on.
Even though the patters are pretty easy to spot for the trained eye, the ones that are new to the business may struggle in pattern recognition. This is nothing to be embarrassed about, but it is something to be aware of, since the ones that do not have too much experience in this area will tend to struggle or misread the patterns presented.
In addition to this, making a neckline can also be very inconvenient for the newbies since they may not be able to draw it in the proper way that will represent what is happening to the market.
Lastly, even though this can be used in most of the markets, there are some concerns that the ration between the risk and reward can vary, and that in some cases will not be favorable after all.
Conclusion
All taken into consideration, this method has its purpose in the assessment of the market and is useful in predicting different ups and downs. Though it has advantages, it is essential to remember the limitations in order to get the best out of it.
