Ok, let’s take a look at real examples of as upward trend action as downward trend: On chart #4 is the same price action as on chart #3, precisely only upward part of it. Here you can see all of the signs that we’ve just discussed. Take a note that during retracements – all pullbacks hold not lower than 0.618 Fib support levels. Also, the trend line holds. Suddenly you get two early notification of possible reversal – divergence and a move down from the top of the Head (since you don’t know yet, that this could be H&S) that is as great as the previous move up. At the end of this move you get third note – break of the trend line. Pipruit: Cool. Also, Commander if we take a close look at the top of the head, we can see that the head itself is a smaller H&S pattern. And after breakout we can see “Kiss goodbye” of a trend line, and start to suspect of appearing of H&S, am I right? Commander in Pips: Absolutely. See, it’s not so difficult. The most difficult in reversal points is not just to see signs of reversal, but to believe in them. When you see some trend day by day, your mind and eyes mechanically look for continuation and sometimes it’s hard to believe in reversal even when you see obvious signs. That’s why is always better to make an analysis in a calm situation – during the weekend or in the evening when you’re not in trading. Chart #4 | 60-min EUR/USD reversals and retracements Commander in Pips: Now let’s move to continuation – chart #5: Chart #5 | 60-min EUR/USD reversals and retracements It’s a bit more complex than previous one, since the move develops in a more choppy and sloppy way. On the top of the chart to the left you see the right shoulder of H&S from chart #4. Here you have triple confirmation of reversal, depending on the time period. The first confirmation you’ve got is with reverse H&S pattern right at the bottom. Also, you can see that when right shoulder was forming, the swing up was greater than previous swing down – this is also a confirmation sign of reversal. Also at this time the market was turmoil around the Greece default. The macro picture was changing every day. But let’s assume that you had thought that this is just a retracement. Indeed, the market has stopped at trend line and 0.618 Fib resistance. Why we should think that something has changed? Later you’ve got the second one – breakout of the trend line and a move to deeper 0.88 Fib resistance. But here you didn’t have a chance to enter, there were no solid pullbacks. Finally the market gives you third possibility – Double bottom pattern in combination with “kiss goodbye” of a trend line and Bullish Divergence. Also, take a close look, can you add something? Pipruit: Hardly, sir, you’ve said everything already… Commander in Pips: Ok, I’ll give you a hint – just combine reverse H&S and Double bottom into single pattern, does it remind you anything? Pipruit: Wow! This is greater double bottom! And market has already confirmed it. And what does it give us? Commander in Pips: If you’ve missed entry point at any of previous reversals, you can try to enter on pullback to 1.40 – the high of this big Double bottom and place a relatively tight stop. Pipruit: I see. You’re right sir, thanks. Commander in Pips: Although we have not paid attention to pivots here or to candlestick patterns that were formed by market on tops/bottoms of classical patterns, but I think that you can do this by yourself. That’s not a very difficult task for you. Pipruit: But how we can protect ourselves from reversal? Commander in Pips: As always – use stop-losses, but use it wisely. First, be sure that this really could be a a trend, or at least that the market will have some momentum. How to do that – we already know – 8-10 bars of thrusting move. Since you know, that the market should not move in countertrend deeper than 0.618-0.786, you may place stop below 0.88, for instance. And then, as the move will continue, drag it higher to new 0.88 from the most recent swing. This is some kind of trailing stop, but a manual sort of. And, what is most important – look at all charts in this part. Any reversal manifests itself by signs that we’ve mentioned. So, as a rule you will follow the signs of reversal, but not anticipate it. For instance, look at chart#1 – there is not even single sign of reversal, right? Hence, if you will follow our rules, you will never take position due to reversal, when in fact, there is no reversal. Pipruit: So, you mean that we will be able to trade reversal signals only when in fact they have appeared already. Other words speaking, we will follow them. Commander in Pips: That’s it. P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon. Note: FPA ranks are earned in the battles against scam, not in the classroom.