Dalal Street Investment Journal - July 09, 2019

22 DALAL STREET INVESTMENT JOURNAL I JULY 8 - 21, 2019 DSIJ.in^

Profit from Trend

Reversal Patterns!

Special Report

There are hundreds of chart patterns available to

trade profitably. Which patterns are more accurate

and should be followed is something best left to the

experts. Vinayak Gangule identifies the trend

reversal patterns that you can profit from.

T

echnical analysis is an interesting study that

requires analyzing chart patterns which help

decode the underlying market trend and

behaviour. Any trader or an investor will agree

that one of the most important things while

studying charts in particular and markets in general is to

identify whether the ongoing trend is going to continue or

reverse. Huge amount of money can be made or losses averted

by identifying early if the underlying trend is getting reversed.

Says Pralhad Dhamne, who has been trading in markets using

technical analysis, “Chart patterns can be classified into

continuation patterns and reversal patterns. Reversal patterns

tell us that an important reversal in the trend is taking place.

Reversal patterns take much longer to form than continuation

patterns. I have personally profited by focusing on reversal

patterns.”

TOP REVERSAL PATTERNS:

1. Head and Shoulders:
   The 'head and shoulders' pattern formation occurs when a

market is in a bullish trend. This pattern is considered to be a

bearish reversal pattern. Head and shoulders pattern appears

in the form of two shoulders and a head in-between. The

pattern starts with the creation of a top on the chart. The price

action then creates a second top which is higher that the first

and, thereafter, the price rallies for a third time, but it fails to

reach the high price achieved during the previous rally.

Identification Guidelines:

Shape:

• The price is in a clear uptrend and then it reaches a peak of

the current rally and thereafter starts to decline. This forms

the left shoulder in the pattern.

• The price completes a decline and rallies again to an even

higher peak. However, the sellers then take control and

push the prices lower towards the previous swing low. This

forms the head in the pattern.

• The buyers make a final attempt to push the price higher,
  but it fails to break the previous high and then the sellers

take control and push the price toward the neckline. This

forms the right shoulder in the pattern.

• The neckline is formed by connecting the low prices

registered between the left shoulder, head and right

shoulders. The neckline may not be perfectly horizontal

and may be upward or downward sloping.

Volume: The volume characteristics are very important in

assessing the validity of this pattern. The volume activity is

higher on the left shoulder than on the head and right

shoulder.

Time frame: The head and shoulder can develop over virtually

any time frame. However, the patterns that take a longer time

to form are more significant and more likely to identify a

meaningful price reversal.

Breakout: The price must break below the neckline along with

strong volumes in order to complete the pattern and reversing

the original trend.

Pattern Psychology: The head and shoulders pattern signals

a possible trend reversal means the formation represents the

loss of faith in the prevailing trend. The right shoulder on the

chart signals a possible trend reversal as the buyers cannot

push the price higher. The breakout of neckline is the next clue

that the sentiment has shifted because the price is now also

making lower lows.

Price Target: Measure the distance from the right shoulder to

the neckline and then apply this length downward starting

from the initial breakout point through the neckline. This will