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Technical analysts and traders believe that certain chart patterns and shapes are signals for profitable trading opportunities. Many professional and amateur traders claim that they consistently make trading profits by following those signals. In this chapter we introduce some types of chart patterns and the corresponding trading strategies, that, according to our extensive historical tests, give the trader an advantage.

"Head-and-Shoulders"

The "Head-and-Shoulders" pattern is believed to be one of the most reliable trend-reversal patterns. The figure below shows an example of a short-term Head-and-Shoulders pattern:


Figure 15. This is the famous "Head-and-Shoulders" formation, a sell signal.

The strategy indicated by the "Head-and-Shoulders" pattern is to short-sell the financial asset as the rate drops down the second shoulder, especially if the volume also goes up. Then one can hold the position until the rate drops all the way down to the level of significant supports and consolidation. This signal also indicates that one should cut loss if the price rises above the tip of the head. A less-risky stop- loss strategy is to cut losses if the rate goes back up the top of the second shoulder.

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