The classical figures of continuation and reversal of the trend are always of great importance to a working trader.
A trader can come across the following figures.
· A figure of the trend prolongation (continuation) indicates that there takes place the trend common correction (recoil). After the end of it, a deal must be opened along the trend. For instance, under the condition of the “bull” trend and the downwards-turned recoil, one must open a deal on “buy”, trying to “surf” with the trend new wave.
· The trend reversal figure indicates that a currency pair has reached its peak, after which the reversal happens. Starting from the peak, one must open a deal against the previous trend direction. For instance, at the top of the “bull” trend, one must open a deal on “sell”, trying to detect (“catch”) the new trend first wave.
Can the reader grasp the idea?
For instance, opening a chart H4, one can see the following.
1. A figure of the trend prolongation (continuation) indicates that a trader must wait till the correction end and then open a deal along the trend (the figure itself is called the trend prolongation (continuation)). Dealing with this trend in this way, one can earn several hundreds of points.
2. Further, finding the figure of the trend reversal, one can earn several hundreds of points more – working in the backward direction.
3. There again occurs the recoil (the figure of the new trend prolongation (continuation)). Opening a deal at the peak of recoil, a trader opens a deal along the trend. A trader can work endlessly according to this technique.
At the same time, is not the reader embarrassed by “some- things”?
For instance, 19 of 20 traders, who lost their deposits, also had religiously examined figures of the tend continuation/reversal.
The author wants to attract the reader’s attention to the three principal problems. The proper solution forms the basis of Masterforex-V Trading System approach in its part, dedicated to figures of the trend continuation and reversal.
1. Classicists of technical analysis of Forex describe all figures of the trend continuation and reversal in such a fuzzy (vague) manner! As the result, these figures become “visible” only after the end of the movement. However, a working trader needs detecting such figures at the very beginning of the movement.
For instance, E. Neiman, finishing the description of dozens of such figures, has made the following conclusion. He recommends not looking for trend figures in the situations, where they are absent. According to this author, it would mean just to practice one’s fantasy to no purpose.
By the way, Neiman’s endnote strikes me as very cynical. I wonder how E. Neiman has managed to present his theory of detecting trend figures in a “specific” manner. As the result, a trader (an interested party!) cannot distinct whether such figures are real or just imaginative – i.e., the trader either cannot detect them or he starts devising trend figures when they are absent. Can you imagine that, in geometry, a triangle and square are described in such a manner that they look like indistinguishable? In science it’s impossible. However, at Forex in its present state, it is commonplace.
2. All classicists of the technical analysis examine all figures of the trend prolongation and reversal at the same chart and within the same dimension (A. Elder makes the only exception). However, there exist an infinitely large number of timeframes (time profiles) – M1, M5, M10, M15, M30, H1, H4, H8, D1, etc. Each of these timeframes is a component of a time profile in a larger scale. In each graph, there are different figures of the trend continuation or reversal. Often such figures are in contradiction with one another.
That is, opening a deal (short or long) with one and the same currency pair, a trader can see:
· a figure of reversal at M15;
· a figure of the trend continuation at H1;
· a triangle at D1.
Hence, what must a trader do? The reader should note the time, necessary for taking the right decision. That is, a trader must have time to determine points of confirmation and cancellation of deals, planned according to the trader’s own calculations. Besides, a trader must be quick enough to install a stop (lock).
The reader should keep in mind that a trader deals with such situations in the majority of trading sessions.
3. Nobody of “classicists” of Forex has tried to attach these figures to other instruments of the analysis
· Elliot waves (the figure of trend reversal makes the end of the 5th wave; the figure of trend continuation is one of correctional waves, etc.);
· the trend slanted channels;
· the levels of resistance and support;
· synchronism in the alley currency pair movement;
· the fundamental analysis;
· Fibonacci levels, etc.
At Forex, the movement is unified. Hence, it must be possible to present correct techniques of giving analysis to this market as a single whole. When developing Masterforex-V TS, I proceeded from this idea.
Examining the 3 above-enumerated problems as a single whole, the reader can understand the reason why 95% of traders lose their deposits.
All classical figures of the trend prolongation and reversal had had being examined by J. Murphy, A. Elder, E. Swagger, E. Neiman and other authors. Later on the corresponding developments were copied into all manuals of the analysis of Forex.
The trend reversal classical figures are the following
· Head and shoulders;
· triple tops and bottoms;
· double tops and bottoms;
· V-like top and bottom (sometimes they call it “spike”);
· rounding pattern or saucer;
The trend prolongation classical figures are the following:
· the triangle;
· the flag;
· pennant (pennon, pendant);
· wedge (chock, gusset, gore);
We now try to look at the well-known figures of the trend reversal from a cardinally new standpoint. Our goal is to deconstruct all inner contradictions, which result in traders’ mistakes. By resolving such contradictions, the reader can learn how to detect
· the end of the movement along the old trend;
· the beginning of a new trend.
The pattern of the “head and shoulders” reversal
Charts from “Technical analysis of future markets: theory and practice” by J. Murphy can serve as the corresponding examples.
(For view the picture see notes in end of article)
J. Murphy describes the “head and shoulders” figure in the following way. In Fig. 5a from his book, one can see an example of the “head and shoulders” pattern in the case of the market top. The left and right shoulders (A and E) are located approximately at the same level. The “head (top)” (C) is located higher than each shoulder. One can see that every successive peak is accompanied by diminution in the trade volume. The pattern is considered accomplished when the price of closing becomes fixed below the line of “neck” (the line # 2). The minimum price guidepost is equal to the vertical distance from the “head” to the line of “neck” – to start from the point of breaking through the “neck” line and downwards. In the course of the successive ascent, the return to the “neck” level is possible. However, prices cannot cross this line.
“Head and shoulders” reversed pattern (the mirror image that appears during the “bear” trend changing into the “bull” one)
(For view the picture see notes in end of article)
The rules of work according to A. Elder (“How to speculate and gain on stock exchange”) are the following.
1. There can occur a decrease in the trade volume, intersection of the trend line and divergence between technical indicators and prices. Seeing the “head” or the right “shoulder” under these conditions, one must sell.
2. After the “head”, the recession forms the line of “orifice (mouth)”. If a trader still holds the position, he must install precautionary (safety) measures below the “orifice (mouth)” line.
3. As a rule, a lift of the right “shoulder” is characterized by small trade volumes and technical indices that indicate the market poor activities. This rise of the right “shoulder” gives the last real chance to go out of the ascending trend with profit. In the right “shoulder” technical indices often reach values greater than in the “head”. However, such values never reach maximum values, obtainable in the left “shoulder”. Selling in the right “shoulder”, the trader must place the “stop” on the level of the “head” peak. The “Stop-and-Reverse” order must be made. If the order is realized, the position becomes closed. Then it is opened in the opposite direction (see “Baskervilles’ Dog” signal).
4. When the “orifice (mouth)” line is crossed over, the recoil with a small volume gives a perfect opportunity for the “sell”. Precautionary (safety) measures must be placed slightly above the “orifice (mouth)” line.
E. Neiman reveals drawbacks of submitting the “head and shoulders” reversal figure (see his “Trader’s small encyclopedia”). This author notes the following.
1. For pity, before a trader will be convinced of the “head and shoulders” classical figure formation, the substantial movement of this price will be already finished.
The reversal and the trend 1st wave towards the backward direction can be missed because of fuzzy criteria, submitted in E. Neiman’s book. This author comforts such traders in a rather original manner. He says that one gets a valuable experience concerning the new trend movement direction. Surely, now the price dynamics is much less intensive. However, already knowing the trend direction, one can be more or less convinced in one’s own position.
2. There is a danger to see the given figure much more often than it really comes into existence. To avoid this, it is obligatory to check the conclusion concerning the figure via the volume indices.
Thus, traders’ losses during the work with the “head and shoulders” reversal figure are caused by the corresponding recommendations submitted by classicists of the technical analysis.
1. Within the framework of this model, one can open a deal only when a substantial part of the movement along the trend new (backward) direction is already over.
2. “The index of volumes” is absent at the handbook-market Forex. Consequently, the principal filter does not exist as well. According to J. Murphy, E. Elder, Swagger and E. Neiman, this filter divides the true reversal (the “head and shoulders”) and the false (unconfirmed) one.
3. E. Neiman states that, after missing a heavy movement towards the backward direction, a trader finally will see the new trend. This thesis is disputable and often erroneous.
a). On the one hand, the “head and shoulders” reversal can indicate the trend 5th wave end – in this case, E. Neiman is right.
b). On the other hand, the “head and shoulders” reversal can indicate the end of the trend 1st and 3rd waves. After their finish, the stop-loss comes into action. Otherwise, the deposit can be lost for good. As it is evident, E. Neiman does not understand these specificities. He just tries to soothe losers (or his own conscience) with above-mentioned phases (about imagining figures and fantasy).
4. A. Elder has introduced a new figure – that of the trend continuation (prolongation). It is the so-called “Baskervilles’ dog” pattern. Being a lame (abortive) version of the “head and shoulders”, it is intended for the following case. Notwithstanding all signs of the “head and shoulders” formation, often a currency can break through the “head” top. Thus,
· the “head and shoulders” pattern formation is canceled;
· the former trend is going on.
“Baskervilles’ dog” pattern: cancellation of the “head and shoulders” figure In “Fundamentals of stock exchange trade”, A. Elder has explained the origin of the pattern title. In the famous detective story, Sherlock Holmes noticed that at the time of crime the dog didn’t bark – i.e., the dog new the murderer. Hence, it was purely family affair. Thus, the enigma was solved.
Analogously, the absence of any action serves as the signal (the absence of the “bark” to be expected!). When the market refuses to “bark” in response to a quite clear signal, one gets “Baskervilles’ dog” pattern: the market, refusing to reverse, keeps on rushing upwards.
(For view the picture see notes in end of article)
The “head and shoulders” pattern in Masterforex-V trading system
The “head and shoulders” reversal figure (the upturned “head and shoulders”) is in detail described in Masterforex-V Trading Academy.
The author suggests tips for the independent search for the answer to the problem, unsolved by classicists of the technical analysis. These prompts are intended for those who cannot take the course in Masterforex-V Trading Academy via internet.
1. The “head and shoulders” reversal figure is a combination (system) of horizontal and slanted channels, in detail described in the previous parts of this Book.
2. One can understand the essence of the given figure by adding 2 lines to the charts by Murphy and Neiman. This permits opening a deal at the beginning of the reversal tendency but not at the end of it.
3. Other instruments of giving analysis to Forex (but not trade volumes) confirm correctness of the reader’s solution:s
· Elliott’s wave theory;
· levels of the resistance and support;
· Fibonacci levels;
· levels of slanted channels;
· alley currency pairs;
· achievement of the goals of the previous movement at the peak (the “head”);
· the time necessary for the formation of the “head and shoulders” figure;
· correlation between various timeframes (4 kinds of the trend), etc.
The problem (test) #1 posed in Masterforex-V Trading Academy. There is a chart from Neiman’s book. The reader should try to understand what’s correct and wrong in this picture.
Chart. The problem (test) #1 (For view the picture see notes in end of article)
It is a perfect test. It permits you to know the degree of your understanding Forex. One must find out the mistakes made by E. Neiman in his picture of the “head and shoulders” reversal figure. Otherwise, the reader will also confuse the true reversal with the trend common correction. Respectively, the reader’s deposit will be inevitably lost.
The analogous mistake is present in J. Murphy’s charts (The “head and shoulders” reversal and the “head and shoulders” upturned figures). Not without reason the author has submitted both figures in the graphical form, the charts of real trades not being depicted.
The problem (test) #2 posed in Masterforex-V Trading Academy.
Because of such mistakes, the real chart that depicts the course of trades takes the following form (see Chart 2.14 from “Trader’s small encyclopedia” by E. Neiman).
Chart. The problem (test) #2 (For view the picture see notes in end of article)
*** The circle designates the area of intersection of the two signals. The “head and shoulders” figure indicates the trend reversal. The “false breaking” through the line of the channel support maintains the channel actual direction. Thus, one can see the “bull” trend victory. A lot of trading traders – who misestimated the situation at that moment – have lost their money. Under those conditions the best way out would be either to wait till the situation would clear up or to look for other confirming signals.
The reader should try to independently detect the mistake made by E. Neiman in the determination of the “head and shoulders” reversal figure. E. Neiman himself has not solved this problem.
The triple and double “top-bottom” figure of the trend reversal
The charts from the following books can serve as examples of such patterns.
· J. Murphy. “Technical analysis of future markets: theory and practice”.
· E. Neiman. “Trader’s small encyclopedia”.
(For view the picture see notes in end of article)
Detecting the triple and double “top-bottom” figure
According to J. Murphy, the “triple top” figure very much resembles the “head and shoulders” pattern (see Chart 5.4a in his book). The only difference is that all the three maximums are located on the same level. Each of the subsequent peaks must be accompanied by a decrease in the trade volume. The pattern is completed when prices break through the level of both declines (recessions), which is accompanied by an increase in the trade volume. The procedure of getting the price guideposts is the following. First, one measures the pattern height. Further the obtained value is mapped on downwards to start from the point of the breaking-through. As a rule, after the breaking-through there occurs the price backward-directed motion towards the lower line.
In Chart 5.4b from J. Murphy’s book, the “triple bottom” pattern is depicted. It is analogous with the “head and shoulders” reversed pattern. The only difference is that all the three minimums are located on the same level. It is a mirror copy of the “triple top” pattern. However, in the case of the upward-directed breaking, the trade volume is more important in the role of the confirmatory factor.
A. Elder states that the “double top” figure becomes formed when prices increase anew up to the previous maximum. Analogously, the “Double Bottom” figure becomes formed when prices decrease anew down to the previous minimum. The 2nd maximum (or minimum) can be slightly lower or higher than the previous one. This fact often embarrasses analysts-beginners.
Double “top” and bottom” are often determined with the help of technical indicators. The latter are often accompanied by divergence of “bull” or “bear” trends. For a trader, one of the best opportunities is to buy in the double “bottom” and to sell in the double “top”.
(For view the picture see notes in end of article)
E. Neiman has pointed out the drawbacks of such reversal figures. Dealing with triple (and especially double) “top + bottom” patterns, one can receive too many false signals. They can be detached just with the help of the parallel analysis of convergence/divergence. RSI oscillator is taken as an example.
The problem (test) #3 from Masterforex-V Trading Academy
1. According to Neiman, there are intensive signals – figures “head and shoulders and “triple top” (“bottom”). Besides, there are signals of moderate intensity – the “double top”.
The task is to determine the difference between the “double and triple tops” in the cases of using different instruments of the analysis of Forex (slanted channels, moving averages, etc.).
2. Can one single out false signals of change in the trend with the help of
· the volume index, not used in the handbook market of Forex;
· RSI oscillator (it’s the index of flat but not that of trend)?
3. What is the difference between the “head and shoulders” figure and “the double or triple top (bottom)”? Here the reader must take into account that, according to Elder, the 2nd maximum (or minimum) can be slightly (?!) lower or higher than the previous one – the fact that often embarrasses analysts-beginners.
However, the reader must think it over what does the term “slightly” imply. Let us suppose that the top is broken through. In this case, should a trader stay out of the market or open a deal? Should one regard this breaking through the top as true or false? Respectively, must a deal be opened along the trend or against it?
The reader must try independently to answer these questions and to find out a mistake in Elder’s argumentations. This error produces a series of trader’s own mistakes. Without the correct answers, it is impossible to gain profit regularly at Forex.
Promptings from Masterforex-V TS for the individual training
· Such figures as “head and shoulders”, “spike” and “diamond” are extreemly intensive signals.
· Such figures as “triple top (bottom)” and “double top (bottom)” are intensive signals.
One must try to understand the difference between figures of these two categories and their features in common.
· The common is the essence of reversal, inherent in all figures.
· The difference between the figures is the reversal form.
By understanding the reversal in its essence, one can see the end of the movement in the given direction.
Seeing the reversal form permits the trader to faultlessly detect the new trend waves or the strong correction towards the backward direction (1-2-3/a-b-c).
Such notion as “slightly”, used by Elder, is unacceptable in Masterforex-V Trading System.
A currency either does not break through the technical level of support/resistance, or the currency does break it – by a strictly determined distance. The corresponding goals (1, 2, 3, etc.) are embedded into Host Computer of Organizer of the universal game of Forex.