Figures of turning the trend
The figures, formed by the drawings, usually groups together in accordance to their degree of importance for the running trend of the trading currency. The figures, evidencing for the coming completion of the trend are known as figures of turning. As opposite of them, the figures on the drawings, which confirm that the trend of the trading currency se being treasured, are called figures of confirmation.
The most important figures of turning the trend are:
- “Head and shoulders” and “Opposite head and shoulders”;
- “Double peak” and “Double bottom”;
- “Triple peak” and “Triple bottom”.
Head and shoulders
The figure “Head and shoulders” is one of the most promising and popular graphic figures. It is formed by the three consecutive upsurges of the drawing prices. The first and the third progress – the shoulders, usually have the same height and the third is the highest. All three upsurges start from the same line of support or line of resistance, in this case with “Opposite head and shoulders”, called line of the neck.
Until reaching the point A, the line of the neck, as it is visible from the was a line of resistance After its breaking, it turns into a steady line of support. The price drawing repulses twice from it to the points B and C. The line of the neck eventually holes in point D – when there is a big trade volume, which proves the opening of the trend. As far as there has been done a break on the steady line of support, the check – up at the line of the neck at point E, which again becomes a line of resistance, is quite natural. After confirmation of the resistance, the price in most cases decreases to the level of the point F – a distance that is called a price aim at the figure “Head and shoulders”. The aim of the price in this case is equal to the distance from the line of the neck to the peak (the amplitude) of the head. For the measuring of the aim, that distance stays low from the break point of the neck line – the straight line DF at the.
Trade signals of the figure “Head and shoulders”
The figure “Head and shoulders” contains the following essential information:
- The support line, passing through B and C;
- The resistance line. After its forming as a result of the break at point D, the market can examine this point for stability at the point E.
- Aim direction. When there is a lack of break on the neck line, under the pressure of the buyers, at point E the figure contains information about the direction of the prices drawing, which will be directly opposite to the direction of the figure itself (i.e. “bear”).
- Price aim. The confirmation of the figure by means of break of the neck line in the background of a huge trade volume reveals the price aim.
One of the basic conditions of the correct interpretation of that figure is the presence of a huge trade volume at the break of the neck line. A break when there is not big volume appears as a serious warning that the break downwards is fake and will end with strong opposite reaction of the price progress. The time, lost for the formation of that figure can be various – from several weeks to several months. A figure of that kind, which has formed during the day (a few hours and shorter) is not reliable. Its reliability is as higher as more time is spent for its formation. Bearing this in mind it is not likely the aim to be achieved. In that sense, no checked recommendations exist, therefore the assumptions about the dead-line of completion the formation of the figure should be built on the base of common sense.
It is advisable the importance of the aim measuring to be underlined exactly from the break point of the neck line. Some analysts from the new generation, who are susceptible to measure the price not only from the break point, but also from the middle of the figure. Apparently, the reason for this is that in the beginning they measure the height of the head. Still, it should be known that in most of the cases “Head and shoulders” is different from the diagram. The fluctuation activity of the prices keeps the hope that the perfect figure “Head and shoulders” could be met often enough. Respectively, the neck line is also rarely strictly horizontal.
Opposite Head and Shoulders
The figure “Opposite Head and Shoulders” appears as a mirror reflection of the previous figure. Therefore, the whole information concerning the symptoms, possible problems, signals and opinions, exposed above is related to this figure, too. It is being formed, when the trade currency wrests away from the “Bear” trend, limited in the canal xx – yy. The price drawing uses the former line of resistance, the line of rising 3, which has eventually turned into a line of support. From the three consequent rising, the shoulders (1 and 3) have for instance identical height, and the head peak is situated lower than the shoulders peaks. Until reaching the point A, the neck line was a line of support. After breaking that line, it turns into a reliable line of resistance. The price jumps away from the neck line twice – at the points B and C. The breaking of the neck line probably will take place at the point D on condition that there is huge trade volume. In relation to the breaking of the steady support line, we could suppose that until the next development, there would be made a check-up of the neck line (point E), which has now become again a line of support. If the line of support manage to resist, it is quite possible that the price will rise, for instance, to the level F, which has now become again a line of support. If the line of support manages to resist, the price will probably rise to the level F, which corresponds to the aim of the price “Opposite head and Shoulders”. The aim of the price is equal, for example, to the head amplitude and is measured from point D at the breaking of the neck line upwards.
The other promising and popular figure of turning the trend is the “Double peak”. This figure consists of two peaks with equal height . As you can see, parallel to the line of resistance, built through two peaks, there it is built a line, which can be considered to be analogous to the neck line from the figure “Head and Shoulders”. If it is reckoned that the old line of resistance was broken at the point A, then after this it has turned into a line of support at the level of the price C, but as a result it is again broken at the point E. Eventually, the line of support turns into a steady line of resistance, which leads to sharply development of the market at the point.
The aim of the price is placed at the level G, located from the break point E at a distance, equal to the middle quantity of the two peaks’ height.
Trade signals for the figure “Double peak” – the figure “Double peak” contain information about:
- The line of support.
- The line of resistance.
- The price direction. If the neck line resists the pressure of the buyers at point F, the figure informs about the further direction of the price movement, which is directly opposite to the peaks’ direction, i.e. “Bear”.
- The price aims. They are determined by the figure confirmation, which is actually the neck line break in the presence of huge traded volume.
A necessary condition for the “Double peak” completion is the presence of huge traded volume at the break of the neck line. It is not useless to remind that the volume data could be borrowed only at the market of the available currency, exploiting the volume and the trade noise fro the futures’ market.
The break at small volume is a clear signal for a fake break, which will be followed by an opposite reaction of the price rise. The time, lost for the formation of that figure could be of all kinds – from several weeks to several months. A figure of this type, formed for several days, hours or even quicker do not appears promising. Its reliability is as bigger as more time has been wasted for its formation. And bearing this in mind, the price aim is not likely to be quickly reached. Anyway, checked recommendations in this direction do not exist, therefore the assumptions about the limits fro the completion of the figure formation are needed to be built on the base of common sense. It is important to measure the aim from the break point of the neck line, not from the middle of the figure, which may come as a result of the mechanic continuation of the peak heights’ measuring.
The figure “Double bottom” is a mirror reflection of the previous figure. Therefore, the characteristics and the conclusion, made above, could be used for it, too. The height of the hollows is, for instance, equal. The neck line is built in parallel to the line which connects the peaks of the hollows B and D. Being a line of support, it was broken at point A and it has turned into a strong line of resistance at the level of the price C, but it was broken at point E. The line of resistance turns into a steady line of support, creating development on the market at point F. The price aim is on the level G, which is situated to a distance of the neck line, equal to the middle hollows’ height, measured at point E.
Triple peak and Triple bottom
The “Triple peak” is a hybrid of the development of the trend figures “Head and Shoulders” and “Double peak”. Respectively the “Triple bottom” is a hybrid of the figures “Opposite head and shoulders” and “Double bottom”.
In classic figure “triple peak”, the height of the peaks is equal. The neck line is built in parallel with the line, connecting the three peaks (B, D and F).
Being a line of support, the neck line is broken at point A and has turned into a strong line of support ate the level of the prices C and E, after which it is broken again at point G. The line of support has turned into a strong line of resistance, provoking a development of the market at point H. The aim of the price is at the level I, placed to a distance, equal to the middle height of the three peaks of the figure, measured at point D. As the “Double peak”, the figure also ends at point E. The price strongly develops towards point F. The line of resistance is kept again and the price sharply decreases to the level G .At this level the pressure of the market leads to a brake in the line of support. After a possible examination of the neck line, the price drops again, striving for reaching the aim.
The opposite thing is related to the “Triple bottom”. In the figure “Triple bottom”, the drops’ heights are equal. The neck line is built in parallel with the line, connecting the drops B, D, F. Being a line of support, the neck line is broken at point A. It turns into a strong line of resistance at the level of the prices C and F, but is broken at point G. The line of resistance turns into a strong line of support, provoking a development at point H. An aim of the price is the level I, situated to a distance, equal to the middle height of the three hollows of the figure, measured at point D.
Figures “Round peak” and “Round bottom”
“Round peak” and “Round bottom” are also known as “Saucers”, formed as a result of the slow and gradual development of the market direction. These figures reflect the market indefiniteness and the trend completion. The trade activity is low. Practically, it is impossible to define which of these situations will really end, not because of insufficient willing to do so. As the other figures of consolidation, the longer this process ends, the higher the probability of sharp price development in a new direction is.
The figure “Diamond” tends to spring up at the trend peak. The movement activity of the prices corresponds to the pace of the figure graphics. The upsurges and the drops of the trade activity reflect in a combination of the intimacy and the remoteness of the line of resistance and the line of support. Until the break, the volume significantly rises. The aim of the price is equal to the height of the diamond, measured from the break point.
“Head and shoulders”, “Double peak”, “Double bottom”, “triple peak” and “triple bottom” are widely known as major figures of trade turning.7