January 2012
Intermediate to advanced
624 pages
17h 49m
English
Chapter 20
“Reversal” Patterns: Double Tops and Bottoms and Head and Shoulders Tops and Bottoms
Since trends are constantly creating reversal patterns and they all fail except the final one, it is misleading to think of these commonly discussed patterns as reversal patterns. It is far more accurate to think of them as continuation patterns that rarely fail but, when they do, the failure can lead to a reversal. It is a mistake to see every top or bottom as a great reversal setup, because if you take all of those countertrend entries, the majority of your trades will be losers and your occasional wins will not be enough to offset your losses. However, if you are selective and look for other evidence that a trend might reverse, these can be effective setups.
All head and shoulders tops and bottoms are really head and shoulders continuation patterns (flags) because they are trading ranges and, like all trading ranges, they are much more likely to break out in the direction of the trend and only rarely reverse the trend. The same is true for double tops and bottoms. For example, if there is a head and shoulders top in a bull market, a breakout below the neckline will usually fail and the market will most likely then reverse up and have a with-trend breakout to the upside, above the right shoulder. The pattern becomes a triangle if it is mostly horizontal or a wedge bull flag if it is slightly sloping down. The three pushes down are the down legs after the left shoulder, the head, and ...
