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.
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
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.