The Head and Shoulders Continuation Pattern

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Head and Shoulders Continuation Pattern

The head and shoulders pattern can signal a continuation rather than a reversal, although it appears in this role rather less. Fortunately, you are not likely to get them confused, because the head and shoulders continuation appears in a downtrend, and the inverse head and shoulders appears in an uptrend. Here is a bearish continuation pattern –

So even in this context, if you see a head and shoulders pattern the odds favor that it will be followed by a downtrend, just as with the reversal situation. The bullish continuation pattern is just the opposite –

That completes our look at patterns. As you can see, they are understandable as merely reflections of the market sympathy – a shortcut to figuring out what the market is going through and how the participants are feeling. They are not magic, but they are valuable in giving you a rapid appreciation of the mood. You should always try to take account of the available information, such as the volume of trading, to verify your first impressions, and we’ll come back to the question of confirmation of technical indications later.

Summary

  • For a reversal pattern to work, you must have a trend
  • The patterns shown are common ones seen at reversals
  • You should wait for the pattern to pass previous levels to confirm that it is valid
  • Continuation patterns represent resting places in the trend
  • You should look for other confirmation before trading on a pattern

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The Head and Shoulders Continuation Pattern

The head and shoulders is one of a group of patterns typically considered trend reversal chart patterns. If you look closely though, the head and shoulders can also act as a continuation. There are some subtle differences between the continuation and reversal, which may just help you find some great trades, and avoid some bad ones in regards to this pattern.

Head and Shoulders Continuation Pattern

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The continuation version looks very similar to the normal reversal head and shoulders, accept there are a few distinct differences:

  • Continuation patterns occur after a sharp up (or run down). When looked at from a broad perspective, this makes the head and shoulders look more like a consolidation than a reversal pattern.
  • The head and shoulders should also be about half the size (or less) of the sharp price run that preceded it. This isn’t an exact measurement, but it should look like a consolidation after a run up, therefore, it can’t cover as much distance as the price run before the pattern.
  • If a potential continuation pattern occurs in an uptrend, the lows of the continuation should reach pretty close to the same level. If the last low is higher than the others, that is fine. If the price breaks significantly below the low point of the pattern, then it is likely a reversal instead.
  • If a potential continuation pattern occurs in a downtrend, the highs of the continuation pattern should reach pretty close to the same level. If the last high is lower the others, that is fine. If the price breaks significantly above the highs of the pattern, then it is not a continuation pattern and more likely a reversal.
  • If it is a continuation pattern, the expectation is for the trend to resume following the pattern.

Head and Shoulder Continuation Examples

Figure 1 shows a strong rally in the GBPUSD, followed by a not-so-pretty head and shoulders pattern.

Figure 1. GBP/USD Head and Shoulders Continuation Pattern – Daily Chart

This is what’s called a complex head and shoulders, since there are two left shoulders (not just one), the lows don’t perfectly line up and then there is a barely a pullback following the right shoulder.

In this particular case, the false breakout below the prior lows indicated the GBPUSD as likely to move higher. Then the higher low following the right shoulder signaled the price was likely to pop, which it did.

If you look closely you will see another smaller head and shoulders right after the one marked on the chart. That one lead to an ever sharper continuation of the trend.

Here is another one. Again it is an ugly pattern, but the attempts to move higher are clearly visible, and the lows stay above the original low. I have drawn a circle around the entire pattern, and notice how that circle is just a blip–consolidation– in the overall trend. Complex consolidations scare a lot of traders out of trades, or even cause them to reverse and go against the trend.

Figure 2. GBPUSD Head and Shoulders Continuation Pattern – 1 Minute Chart

Get used to seeing patterns like in Figure 1 and Figure 2. Let the pattern develop. Only if it drops out the bottom (uptrend) is the price likely to reversal.

You can buy near the support of the continuation pattern. This way, you can place a stop just below the pattern, keeping risk quite small, and your target can be well beyond the top of the pattern. For managing trade expectations, see Make a Little Money Before a Lot of Money.

These types of patterns occur in uptrends and downtrends. Don’t worry too much about how the pattern looks. If there is a strong price run prior the pattern, view the pattern as a consolidation, with the expectation that the trend (the prior strong run) direction will continue. If already in a trade, you can hold through the pattern, or you can enter during the pattern near support (uptrend) or resistance (downtrend) of the pattern. Assume it is a continuation until the point where it becomes a reversal. For more on consolidations see: Should I Hold Through a Pullback, or Get Out?, Part 1 and Part 2.

Do continuation head and shoulders patterns really exist?

A number of readers have questioned the legitimacy of the continuation pattern. They claim that such a pattern does not exist.

Well, it is time to set the record straight!

Schabacker, Edwards and Magee are the authoritative sources on classical charting principles. The three men never claimed to be the final word on Gann or Elliott or moving averages or candlesticks. But, they are the final word on classical chart patterns.

Here is what Edwards and Magee had to say about the continuation H&S pattern (Technical Analysis of Stock Trends, 5th Edition, pages 181-182):

“All our references to the Head-and-Shoulders formations up to this point…have considered that pattern as typifying reversal of trend, and in its normal and common manifestation that is most definitely the Head-and-Shoulders function. But occasionally prices will go through a series of fluctuations which construct a sort of inverted Head-and-Shoulders picture which in turn leads to continuation of the previous trend.”

“There is no danger of confusing such continuation or consolidation formations with regular Head-and-Shoulders Reversals because, as we have said, they are inverted or abnormal with respect to the direction of price prior to their appearance. In other words, one of these patterns which develops in a rising market will take the form of a Head-and-Shoulders Bottom. Those that appear in declines, assume the appearance of a Head-and-Shoulders Top.”

Now, some folks opposed to the concept of the continuation H&S have parsed Edwards and Magee’s description — pointing out that the exact wording used included “sort of” and “will take the form of.”

I think that such parsing is equal to hair splitting. So did Richard W. Schabacker. In his manuscript, Technical Analysis and Stock Market Profits, written in 1937, Schabacker alluded to the fact that the continuation H&S serves a different purpose than the reversal H&S, but concluded with the following:

“This formation is not a true Head and Shoulders for a number of important reasons but we must admit that it is difficult to find a better name for it….we shall accept the suggested name and call it the Continuation Head and Shoulders.”

So, when I define a pattern as a continuation H&S formation, I am in some pretty good company. For those of you who still take exception to the labeling, take it up with Schabacker, Edwards and Magee.

By the way, the chart below displays one of the most classic continuation H&S patterns of all time.

I believe Schabacker, Edwards and Magee would have accepted this labeling, and that is good enough for me. Of course, I could start referring to the pattern as the “a reputed, appearing as, but conditionally qualified, sort of continuation H&S pretender.” Nah, I think I will just refer to it as a continuation H&S pattern, same as I have been doing all along.

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