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Chart Patterns 101

The 4 most important chart patterns to pay attention to when trading are Double bottom, Double top, Head and Shoulders, and Reversed Head and Shoulders.

Double bottom ¬ Bullish trend

When the first bottom is made, draw a line from the bottom of the candlestick body and the bottom of the wick. If there is a pullback and another dip, we can see a possible double bottom when the chart tests the previous bottom. If the candlestick on the 2nd bottom closes below the bottom of the lowest low of the previous bottom, it is NOT a double top. It has then broken the resistance and there is a possible bearish reversal of the trend. If the chart tests the area between the candlestick body low and wick low, but doesn’t close below it, it qualifies as a double bottom. Note that The 2nd bottom can have a wick that goes below, but cannot close below.

Double top ¬ Bearish trend

When first top is made, draw a line from the top of candlestick body and top of wick. If there is a pullback and another swing high, we can see a possible double top when the chart tests the previous top. If the candlestick on the 2nd top closes above the highest high of the previous top, it is NOT a double top. It has then broken the resistance and there is most likely trend continuation to new higher highs. If the chat tests the area between the candlestick body high and wick high, but doesn’t close above it, it qualifies as a double top. Note that the 2nd top can have a wick that goes above, but cannot close above.

Head and Shoulders ¬ Bearish trend

A Head and Shoulders pattern forms when the market pushes up, then down (forming the first shoulder), pushes back up and creates a new high (forming the head), only to pull back again and retest the first shoulder. If the candle closes below the lowest low of the last candle of the first shoulder, it is NOT a head and shoulder. If it retests this area, but closes above the lowest low, it is potentially a head and shoulder. From this point, if the market goes up and tests the first shoulder, but cannot close above the head of the pattern, pulls back, and closes below the lowest low of the last candlestick of the first shoulder, it is a head and shoulders pattern.

Reversed Head and Shoulders ¬ Bullish trend

A reversed Head and Shoulders pattern forms when the market pushes down, then up (forming the first reversed shoulder), pushes back down and creates a new low (forming the reversed head), only to pull up again and retest the first reversed shoulder. If the candle closes above the highest high of the last candle of the first reversed shoulder, it is NOT a reversed head and shoulder. If it retests this area, but closes below the highest high, it is potentially a reversed head and shoulder. From this point, if the market goes down and tests the first reversed shoulder, but cannot close below the reversed head of the pattern, pulls back and closes above the highest high of the last candlestick of the first reversed shoulder, it is a reversed head and shoulder pattern.

The Secret to Candlestick patterns

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