Forex Trend Reversal: The Head-and-Shoulders and the Inverted Head-and-Shoulders Patterns

There are different reversal patterns that can be used in forex technical analysis. This article considers two of them - the Head-And-Shoulders and the Inverted Head-And-Shoulders.

Head-And-Shoulders Trend Reversal Pattern

The head-and-shoulders pattern is one of the most reliable and popular trend reversal patterns that can be observed on charts. This chart formation includes three successive rallies and depicts the following currency price movement:

1. The currency price rises to a peak and then declines.
2. The price rises again, this time above the previous peak, and then declines again.
3. The price rises for a third time, this time below the second peak, and then declines again.

The shoulders are represented by the first and the third peaks, which are of an about equal height. The head is represented by the middle peak, which is the highest of the three. The neckline is the support line on which all of the three rallies are based. The head-and-shoulders pattern is considered confirmed and complete when the price falls below the neckline after the second shoulder.

In order that the head-and-shoulders formation successfully develops, the neckline should be broken under the conditions of a heavy market volume. As a sign for a false breakout a breakout occurring on a light volume is considered. This will cause an adverse reaction in the price of the currency.

Inverted Head-And-Shoulders Trend Reversal Pattern

A mirror image of the head-and-shoulders formation is the inverted head-and-shoulders pattern. This means that the same characteristics as well as potential drawbacks and signals can be referred to this type of chart formation.

The pattern includes three successive lows and depicts the following currency price movement:

1. The currency price falls to a low and then rallies.
2. The price falls again, this time below the previous low, and then rallies again.
3. The price falls for a third time, this time above the second low, and then it rallies again.

The inverted head-and-shoulders reversal pattern is considered complete when the price rises above the neckline.

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