Welcome to Binary Options 205, Pattern Formations. This is the fifth video in our Binary Options 200 course, brought to you by binaryoptions.education.
In previous videos, we have looked at market types, and how price behaves when it uptrends, when it downtrends, and when it moves in a sideways direction. In this video, we’re going to look at the common pattern formations that are created by price when price changes from one market type to another market type.
For example, price can be uptrending, but soon be downtrending. Or price can be in a downtrend, and soon become a range. Uptrends, downtrends, and ranges do not last forever. Price changes direction. Trends can reverse. And when these changes happen, more often than not, recognizable patterns are created by price. And in this video, we will look at those patterns.
So the common pattern formations we’ll be looking at in this video are double tops, double bottoms, head and shoulders, and inverted head and shoulders. I’ll give an illustration for each on these slides. And then I’ll give some demonstrations on real life price charts.
Let’s look at a double top. First of all, when price is uptrending, we know we have a series of pushes and pullbacks, or rallies and retracements. And we have this stepping motion that price creates as it moves on the upside. And the main characteristic of an uptrend is higher highs and higher lows. We have a high, a low, a higher high when compared to the previous high, a higher low when compared to the previous low. And this characteristic continues until we get to this point where we have a double top.
Let’s look at this double top. We have a pullback after a push. Price goes for another push. It goes to create another higher high, but it can’t do it. And price retraces, or pulls back, before we have created a higher high.
Generally these double tops create a similar high to the high previous, but that is not the characteristic of an uptrend. And you find that when price cannot push any higher, we have a stronger retracement or pullback, which breaks the previous low, and then price starts to down trend. And this will make more sense as we look at some examples on real life price charts.
So why is a double top formed?
The simple explanation is there is not enough buying power to push price any higher. The bulls are running out of steam, the bears are coming in, and price changes direction. Now the reason for that could be 100 reasons. It could be a news event. It could be that this level is a major resistance in this particular the market. And the list could go on. But quite simply, there is not enough bullish momentum to make a higher high, and price reverses.
So a double bottom is very similar to a double top, but it can be formed at the end of a downtrend. A downtrend is a series of pushes and pullbacks, or rallies and retracements, that creates lower lows and lower highs.
Let’s look at this double bottom. Price pushes, it pulls back. It goes for another push , but can’t push any lower than the previous low. And that is not the characteristic of a downtrend. Price pulls back, breaks the previous high. And price then could uptrend, or it could range, but this downtrend is now over. So both double tops and double bottoms can be referred to as failed pushes– price fails to push any further.
This is an illustration of a head and shoulders. Once again, we have our uptrend– price pushes, it pulls back, it pushes. We have higher highs and higher lows. Everything’s looking healthy. But instead of a failed push like the double top, we have a strong retracement, or pullback, that brings price back down to a similar level of the previous low. And we don’t make a higher low, which is the characteristic of an uptrend. Price then goes for a final push, cannot make a higher high and reverses.
Some characteristics of this head and shoulders are there are three peaks rather than the two on a double top. The center peak is always larger than the other two, hence the name, the head and the shoulders. And you often find that the peaks either side, or the pushes either side of the head, push to a similar level. And that these lows are also at a similar level. And we’ll look at some strong examples of head and shoulders on a price chart very soon.
An inverted head and shoulders– just as we have double tops and double bottoms, we have head and shoulders and inverted head and shoulders. We have the head and shoulders pattern, but this time it’s at the bottom of a downtrend rather than at the top of an uptrend. So let’s look at some examples on the pound against the dollar four hour chart.
We have a number of trends on this four hour chart, and some great examples of the pattern formations just demonstrated in the slides. We have a clear uptrend. We have a push, a pullback. Price goes for another push, and pulls back. So, so far, everything is healthy.
We have a high. We have a low. We have a higher high. We have a higher low. Price goes for another push. It just makes a higher high. Pulls back, breaks this low, goes for another push, and then goes on the downside. And we get this trio of peaks.
Here’s our head and here are our shoulders. Notice how the shoulders are at a similar level. The head pushes higher than its shoulders, and price reverses very strongly on the downside. We have this downtrend. We have a push, a pullback, a push, a pullback. So everything is healthy.
Lower highs. Lower lows. Go for a push, have a pullback. We have a lower low. Price then goes for another push , but can’t make a lower low. But we create a very similar low. Price then pulls back. This high is broken, and price is uptrending. A very clear double bottom at the end of a downtrend and the start of an uptrend.
We then have an uptrend, rallies and retracements. Higher highs and higher lows. Everything looks higher until we get to this point. Price pulls back, goes for another push, and then pulls back, and breaks this low. We go for a final push, and then price downtrends. A clear head and shoulders once again.
Let’s look at this downtrend. Price falls heavily on the downside. Here are our highs and our lows. Price pushes, pulls back, pushes again, and reverses. Another double bottom.
Double tops, double bottoms, head and shoulders, and inverted head and shoulders appear all over the Forex markets, and any financial markets.
This was a four hour chart. We go to a weekly chart. We can even change the currency pair. The pound against the Japanese yen. And look at this very clear head and shoulders. You don’t get much clearer than that. Price is clearly uptrending. We have our pushes and pullbacks, and a clear head and shoulders marking the reversal.
In our next video, I will teach about chart setups. And this is where we start combining everything from the 100 series and the 200 series to create some profitable chart setups. I will teach about analyzing financial markets, and then looking for specific signals which can lead us to profit from financial markets. Thank you so much for watching.