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Traders use a whole host of techniques to analyse charts, from indicators, to patterns, historical cycles and much more. However, while much of the methodology utilised by traders revolves around indicators that are derived from the price, it is the price itself that is the most important aspect of any chart.
With that in mind, the utilisation of charting patterns is of particular importance, as it is simply the method of reading swing highs and swing lows to derive a market view. Below are three patterns which are particularly powerful when seeking to read charts.
Head and shoulders
The head and shoulders formation is one of the most famous patterns, given its distinctive name and shape. However, it is also one of the most powerful reversal patterns, given the implications in terms of swing highs and swing lows. Taking a standard head and shoulders pattern as an example (rather than inverse), the creation of higher highs and higher lows within an uptrend will be fully negated when we have both a lower high and lower low.
The head and shoulders pattern necessitates both of those factors, thus pointing towards a reversal. The longevity of such downside can be difficult to predict, with wider factors (such as historical trends) playing a major role. However, many will aim for a downside target, which equals the neckline to head distance (see below).
On this occasion we have a particularly strong pattern, with the prevailing downtrend coming back into play. For many, betting against the trend is a big no. So, finding a head and shoulders that could be marking the end of a retracement could be an especially useful way of trading a reversal pattern with the trend.