Price PatternsWhether the market is ranging or trending, price movements are not always smooth. As a result price pattern identification is used to determine whether a market trend is intact or whether there exists the possibility of a reversal.
On the basis of chart formations significance to the current trend of the currency they fall into two categories: reversal patterns and continuation patterns.
A prerequisite for any reversal pattern is the presence of a trend.
Reversal patterns are often accompanied by a break in the trend line or pivot point. (The larger the pattern, the greater the significance.)
Head and Shoulders Reversal Pattern
The Head and Shoulders pattern is one of the most popular patterns but also one of the most difficult to identify. This pattern derives its name from its formation — which resembles a person. A true head and shoulders pattern will have the left and right shoulders roughly at the same height and distance from the head. The neckline should be almost level.