HEAD AND SHOULDERS TOP PATTERN � Part 1: Formation

Head and Shoulders Top is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish. This pattern is very popular because it is regarded as one of the most reliable of all patterns.

The Formation of Head & Shoulders Top Pattern




Head and Shoulders Top Pattern contains three consecutive, sharp peaks / tops, whereby the middle peak is the highest (Head) and the other two peaks (left & right peaks) are lower & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing uptrend. The price increases and hits a high then declines (forming the Left Shoulder). Afterwards, the price increases to an even higher high and then declines again (forming the Head). The Right Shoulder is formed when the price rises again but it does not hit the high of the Head. Instead, the price falls back after it has reached about the same price level as the Left Shoulder.
Although the Left & Right Shoulders do not necessarily need to be exactly the same, but it should appear roughly equal to one another.

The important part of this pattern is the Neckline. The Neckline is formed by drawing a line that connects two low points: (1) the low point in between the Left Shoulder & Head, and (2) the low point in between the Head & Right Shoulder.
This Neckline can be horizontal, sloping upwards or downwards.

The pattern is only completed and confirmed when the price decreases and closes below the Neckline, which serves as the key support level in this pattern.

Although Head & Shoulders Top is viewed as a common pattern and quite easy to identify, it�s actually not the case. Therefore, one should pay close attention & take proper steps to analyze the characteristics of Head & Shoulders Top in order to minimize / avoid making mistakes in spotting the pattern.
The characteristics of the pattern will be discussed in more detail in the next post.

Continue to Part 2: Important Characteristics of Head & Shoulders Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* 10 Important Trading Lessons
* Learning Candlestick Charts
* Options Trading Basic � Part 1
* Options Trading Basic � Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option�s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Read more »

Trading Educational Video: �Day Trading Made Simple�

If you�re keen to learn some knowledge about Day Trading, here is the chance to learn from a renowned trading expert William Greenspan for FREE.

Watch this video, and grab this chance while it�s still free.

Read more »

A Technical Video Analysis of the Equity Market

Although all the indices are undergoing some correction recently, the major trend for all the indices still remains positive. However, the trend may potentially reverse to negative in these markets should the key reversal price levels are broken.

This new short video will show you an analysis of where the key reversal area is in the S&P 500, the NASDAQ, and the Dow, if in fact the markets are ever going to reverse to the downside.

Read more »

Conditional / Contingent Order � Part 2: Examples

Go back to Part 1: How It Works.

Examples of Conditional / Contingent Orders:

Example 1:
Stock XYZ has been trading in a range between $30.00 and $35.00. You want to place a buy order to buy the shares of XYZ when the stock has broken out the range and show upward price movement. You can place a contingent order and set a condition that when the price is trading at $35.20 or above (Trigger Price >= $35.20), place an order to buy XYZ at $35.30 (i.e. Limit Order with Limit Price $35.30).
Suppose when the market opens the next day, XYZ opens at $35.25, the order will be triggered and sent to the market as a Limit order. The order should be executed at a price around $35.25. Basically, the order will only be filled with the price $35.30 or lower.
However, suppose stock XYZ opens at $40.00, the order will be triggered, but it won�t be executed as the price is higher than the Limit Price. Hence, this can prevent you from buying more than the price that you�re willing to pay.

Example 2:
Adding to Example 1, suppose that in order to ensure that there is also sufficient momentum leading to the price breakout of the trading range, you also want to specify a minimum volume target of 300,000 units traded.
In this case, if the price increase to $35.20 or above, but only 200,000 units are traded that day, then your order will not be triggered.
Only when both the price is $35.20 or above AND the volume traded on that day (i.e. all units traded on the day the price is traded at $35.20 or above, including units traded at both above and below $35.20) is 300,000 units or more, the Limit order to buy stock XYZ at the price $35.30 or below will then be triggered and submitted to the market.

Example 3:
You own Call option contracts of stock ABC and would like to sell the options if a certain market index falls below 10,000. You can place a contingent order and specify a condition that if the market index drops to below 10,000, your order to sell will be triggered and sent to the market.
In this case, you can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
Remember that since the security you will be selling is options, when you place Limit Order, Stop Order, or Stop Limit Order, the Limit Price or Stop price you specify must be the options premium, not the stock price.

Example 4:
You�ve observed that normally when stock price of ABC drops, stock XYZ would also drop shortly after. Currently, stock ABC is trading in the range of $15 to $18. You expect that the stock ABC will fall and break down the trading range. When that happens, you wish to buy Put options of stock XYZ.
You can place a contingent order and set a condition that if the stock price of ABC falls to or below $14.80, your order to buy Put options of XYZ will be triggered.
Likewise, you can choose to have Market Order, Limit Order, or even Buy Market-If-Touched (Buy MIT) or Buy Limit-If-Touched (Buy LIT) Order (if available) to be sent to the market when the condition is met.

Example 5:
You have short sell stock PQR at $20.00 and wish to buy it back to take profit when the price has fallen to $18.00 (your profit target). In addition to the price condition, you also want to set a minimum traded volume before the order can be triggered.
For this purpose, you can place a contingent order and set a condition that if the stock price of PQR has fallen to 18.00 or below and at least 100,000 units of PQR are traded, your order to buy (back) the stock will be triggered. You can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
In this case, if the price falls to $18.00 or below but only 90,000 units are traded that day, then your order will not be triggered.
Only when both the price is $18.00 or below AND the volume traded on that day (i.e. all units traded on the day the price is traded at $18.00 or below, including units traded at both above and below $18.00) is at least 100,000 units, the order will be triggered and submitted to the market.

For the list of other types of order, go to: Types of Orders in Trading.

Read more »

10 Important Trading Lessons

I got to know that there is a series of free trading lessons, which consists of 10 topics that traders, both beginners and experienced traders should find them very useful.
While for more experienced traders, they could serve as a refresher, I think these trading lessons are particularly even more important for beginners.

The 10 Free Trading Lessons will cover the following topics:

(1) The importance of psychology in price movement.

(2) How to spot mega trends.

(3) Understanding of technical price objectives.

(4) How to picture price objectives.

(5) How to trade with moving averages.

(6) How to use point and figure trading techniques.

(7) How to use the RSI indicator.

(8) How to correctly use stochastics in your trading.

(9) How to use the ADX indicator to capture trends.

(10) How to capitalize on natural market cycles.

On top of the above, you will learn all about Fibonacci retracements, MACD, Bollinger Bands, and much more.

These 10 free trading lessons will be sent via email.
In order to get this, just fill out the form here. Then you should be able to get it started very soon.
Hope this info can be useful to you. :)

Read more »

Conditional / Contingent Order � Part 1: How It Works

Conditional / Contingent Order is an order with sets of criteria attached (specified by the trader / investor placing the order), which will automatically be submitted to the market if the predetermined sets of criteria are met.

How Conditional / Contingent Order Works
Conditional / Contingent Order can be specified as a Market Order or Limit Order.
You can then set one or more conditions attached to the order, and normally the condition is set in terms of price and/or volume.
You can also specify those conditions for stock, option or combination orders, and use many different triggers (e.g. the price and/or volume of the security being traded and/or another security, including security index).

When you are setting condition in terms of Price & Volume, for the order to be sent to the market, not only the price must pass the preset trigger price, but also the trading volume must also exceed certain target.
Hence, volume condition serves as additional safeguard in order to avoid an order being sent to market without sufficient momentum (e.g. when the price is trading at just slightly outside your trigger price but only in small volume, which does not really indicate a significant market sentiment change).

For Volume condition, the Volume Target (i.e. the units traded limit) will consider all units traded on the day the price condition is met, including units traded at both above and below the condition price / Trigger Price.

Therefore, if you enter a Volume condition, your Conditional Order would only be triggered and submitted once the Price Trigger has been passed and your Volume Target has been reached both on the same day.

Note:
As Conditional / Contingent Order is a more complicated order, not all brokerages can accept this order.
Even the procedure or rules of how to place a Conditional / Contingent Order may vary from one to another brokerage. Some brokerages may also only allow setting conditions for prices, but not volume.
Hence, you need to check with your own brokers specifically how to do it.

Normally, you are allowed to amend or cancel a conditional / contingent order any time before the conditions you have set are met. However, once the conditions have been met and the order has been triggered, it is not possible to cancel the conditional / contingent order.

Continue to Part 2: Examples

For the list of other types of order, go to: Types of Orders in Trading.

Read more »