The Rorschach test (the interpretation of pictures and the attribution of meanings to them) lives and thrives beyond psychoanalysis. Even before the birth of the crypto market, financial analysts noticed that the charts of technical analysis form the same figures from time to time after the appearance of which the price of the asset behaves in a certain way. There are concepts in the daily lives of traders known as "head and shoulders," "pennant," and others. In today's review, we will discuss what these images mean.
But first, a couple of important accents for working with chart figures:
In graphical analysis, any "picture" always includes levels of support and resistance;
Wait for the complete formation of the graphic model before forming new orders!
Head and Shoulders
This is a classical picture of the reversal trend. It happens to be both standard (in the figure above), and inverted, in the case of a downtrend. In the standard graphic model, the "head" is the highest average peak in the chart, and the "shoulders" are relatively equal smaller peaks to the right and left of the "head." The base of all three peaks is the support line, and it is also called the "neck" of the pattern (we wrote about the support and resistance lines earlier). Returning to the topic of the formation of the model, the figure known as the "head and shoulders" is considered fully completed when the level of support (in the standard case) or resistance (in the case of an inverted "head") is broken.
In this case, the model is considered more reliable if, with an upward trend, the right shoulder is lower than the left one, and with the descending trend, the right shoulder is higher than the left one.
As the price tends to return to the support and resistance lines, punching through them in test mode, the most reliable figure will be the chart formed over a longer time interval.
With an uptrend, the break of the neck line symbolizing the completion of the formation of the graphic model serves as a signal to sell the asset, as the trend has confirmed the reversal and the price will go down. Similarly, a neckline break with an inverted "head" serves as a signal to buy an asset, as the price will definitely continue to grow.
Double Top or Double Bottom
The double top or double bottom figures also signify an upcoming trend reversal. The double top represents two price highs fixed at one level and supported by a support line. This occurs when the trend encounters a strong resistance line. The trend turn is observed when the price after two takeoffs breaks the support level (the line from which the price has already "jumped" twice) and starts its way down. At this point, assets, of course, need to be sold. The double bottom (W) is a mirror reflection of the double top (M) and signals a change in the trend to an uptrend, which is a good reason to invest in the asset.
Triangles are one of the most frequent figures of technical analysis. There are ascending, descending, symmetrical and divergent ones. Depending on the type of triangle, we can speak of both a confirmation of the trend and its swift reversal. The appearance of a downward triangle on an uptrend is not a reason for panic. As a rule, the price continues to grow after going beyond the limits of the figure. The absence of an uptrend before the formation of a triangle is a signal to the fact that the price will keep dropping.
When a triangle appears on the chart, it is better to seek shelter and wait for things to blow over. The unpredictability of price behavior within the pattern may negatively affect the financial results of the transaction. Experienced traders know this, and a triangle is often accompanied by a decline in trading volume. After its completion, however, the volume of trading increases sharply, since the emerging trend, as a rule, is fairly stable and can bring profit.
We will talk about the variations of triangles and other important figures in the second part of this review.