HEAD AND SHOULDERS BOTTOM PATTERN – Part 1: Formation

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

The Formation of Head and Shoulders Bottom Pattern



Head and Shoulders Bottom Pattern contains three consecutive, sharp bottoms, whereby the middle bottom is the lowest (Head) and the other two bottoms (left & right bottoms) are higher & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing downtrend. The price falls and hits a low then bounce up (forming the Left Shoulder). Afterwards, the price falls to an even lower low and then bounces up again (forming the Head). The Right Shoulder is formed when the price drops again but it does not reach the low of the Head. Instead, the price bounces back up after it has hit 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 high points: (1) the high point in between the Left Shoulder & Head, and (2) the high 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 increases and closes above the Neckline, which serves as the key resistance level in this pattern.

Although Head & Shoulders Bottom 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 Bottom 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.

To be continued to Part 2: Important Characteristics of Head & Shoulders Bottom pattern.

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

Analysis Tool:
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Related Topics:
* 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

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Market Analysis Video: Bearish View on Dow and S&P markets

Watch the following videos for an update on Dow and S&P markets:
* Dow market analysis
* S&P market analysis

In the videos, you’ll again see the “power” of Fibonacci tools, along with MACD Divergence analysis. Happy watching! :)

Other Free Trading Videos for Learning Resources:
FREE Trading Educational Videos with Special Feature

Analysis Tool:
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Binary Options

What is Binary Options?
According to Wikipedia, Binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all.
There are two main types of binary options:
* Cash-or-nothing binary option: Pays some fixed amount of cash if the option expires in-the-money.
* Asset-or-nothing binary option: Pays the value of the underlying security if the option expires in-the-money.

Hence, the options are “binary” in nature, because there are only two possible outcomes.
They are also called all-or-nothing options, digital options (more common in forex / interest rate markets), and Fixed Return Options / FROs (on the American Stock Exchange).

For example:
A trader speculates on a binary cash-or-nothing Call Option on Company ABC that its stock price will be at $50 at the expiry date with the investment amount of $100.
If at the future expiry date, the stock is trading at or above $50, the trader will receive $100, in addition to $100 invested.
If the stock is trading below $50, nothing is received. That means he lost all the $100 invested.

One broker that provides Binary Options Trading is StartOptions.
StartOptions offers a FREE Demo Account that will allow newbie’s traders to become familiar with their product and user-friendly platform, as well as testing and improving trading strategies. The demo account operates exactly the same as a real account, enabling you to have the full binary options trading experience without risking real money.

StartOptions’s "Above Below" game lets you trade real-time binary options across various financial instruments; from US stocks and Indices to commodities and Forex Pairs.

On a virtual account you can buy CALL (Above), or buy PUT (Below) and trade the same way you would in the real account. You will also have access to your trading history, as well as all the tools and features of the trading platform.
Every new player begins his trading journey with a virtual wallet of $500 to speculate with and to show the world his trading skills.

What is the payout for the options traded in "Above Below" game?
StartOptions's "Above Below" game offers up to a 75% payout for successful trades (options that expired In-the-money), and a 10% return for unsuccessful trades (options that expired Out-of-the-money).
You can take trading positions for as little as $30.

Example:
You can speculate $100 that the price of Google stocks will be higher than the current stocks in one hour from now. If correct, you will receive 72% payout on your initial investment i.e. your account will be credited with $72 in addition to your $100 investment.
On the other hand, if by the end of the hour Google's stock is lower, you'll keep 10% of your investment, i.e. your account will be credited with $10. That means you lose $60 in this case.

What is a Call Option in "Above Below" game?
An option that yields a profit when the option closes higher than the level it was purchased at. If it closes at exactly the same price, the original investment amount will be returned to the player.

What is a Put Option in "Above Below" game?
An option that yields a profit when the option closes lower than the level it was purchased at. If it closes at exactly at the same price, the original investment amount will be returned to the player.

What is 'In-The-Money' expiry in "Above Below" game?
A professional term to describe a successful option trade in "Above Below" game, i.e. a CALL option that expired above the option price during purchase, or a PUT option that expired below the option price during purchase.

What is 'Out-of-the-money' expiry in "Above Below" game?
A professional term to describe a failed option trade in "Above Below" game, i.e. a CALL option that expired below that expired above the option price during purchase, or a PUT option that expired above, or at the same option price during purchase.

What kinds of instruments are traded on StartOptions?
US Stocks:
Apple (Symbol: AAPL), Cicso (Symbol: CSCO), Citybank (Symbol: C), Google (Symbol: GOOG), Microsoft (Symbol: MSFT), Yahoo! (Symbol: YHOO).

Forex Currency Pairs:
EUR/USD, GBP/USD, USD/CHF, USD/JPY, USD/CAD, GBP/JPY.

Commodities:
Gold, Platinum, Silver.

How to start trading the markets?
You can register via this link, then click “Register”.
After the registration procedure you will receive a confirmation e-mail to the e-mail address you entered during registration, after confirming the e-mail log in to: StartOptions.com and start trading.

When you’re ready for trading of binary options using real money, you can open an account with them.
The initial minimum deposit amount is either USD100, EUR100 or GBP100.
Deposits can be made with Visa, MasterCard and Diners cards. Also by wire transfer, moneybookers and several debit cards.

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