Alexander Elder, a legend in financial markets, first mentions the trend continuation pattern ‘Baskerville’s Hound’ in his book ‘Trading for a Living’.
The pattern is quite common and, in essence, is an unsuccessful trend reversal pattern ‘Head and Shoulders’. In technical analysis of the Forex market, ‘Baskerville’s Hound’ is considered a trend continuation pattern, although most market researchers do not include it in the list of classic continuation patterns: flag, wedge, triangle, etc.
How to Build the ‘Baskerville’s Hound’ Pattern on Forex
As mentioned above, the ‘Baskerville’s Hound’ technical analysis pattern is an unsuccessful ‘Head and Shoulders’ trend reversal pattern. The ‘Head and Shoulders’ pattern indicates the end of an upward trend, its reversal, and consequently, the opening of short positions.
The ‘Baskerville’s Hound’ pattern appears when the market shows an absence of the expected classical reaction to the ‘Head and Shoulders’ pattern – that is, the breakout of the ‘neckline’ of the ‘Head and Shoulders’ pattern turns out to be false, and instead of a decline, the price continues to rise.
The name of the pattern is not accidental. It was inspired by Arthur Conan Doyle’s story ‘Baskerville’s Hound’, in which the dog did not bark during the murder because the killer was a family member. The absence of the expected reaction, that is, the dog’s barking, allowed Sherlock Holmes to solve the mysterious murder.
By analogy, the ‘Baskerville’s Hound’ pattern is the absence of the expected ‘dog barking’, that is, a price decline after the appearance of the ‘Head and Shoulders’ pattern.
The ‘Baskerville’s Hound’ pattern is considered formed after the price overcomes the high of the ‘Head and Shoulders’ pattern.
It should be noted that Alexander Elder provides a description of the pattern but does not mention specific conditions for its emergence. It can be assumed that the main factor in forming the ‘Baskerville’s Hound’ pattern is some fundamental events, and the technical sign of the pattern is the continuation of the upward trend, expressed in overcoming the high of the ‘Head and Shoulders’ pattern.
Also, keep in mind that none of the technical analysis patterns imply a 100% probability of their execution, so the ‘Head and Shoulders’ pattern itself is a premise for the emergence of ‘Baskerville’s Hound’.
Using the ‘Baskerville’s Hound’ Pattern in Forex Trading
The classic way to open a position using the ‘Head and Shoulders’ pattern involves opening a short position after breaking the ‘neckline’.
If the breakout proves to be false and the ‘Baskerville’s Hound’ pattern forms, remember the classic rule of candlestick technical analysis – the pattern is considered formed only after overcoming the defining technical line. For this pattern, the defining line is the high of the unsuccessful ‘Head and Shoulders’ pattern.
Accordingly, when the price breaks this level, the short positions opened based on the ‘Head and Shoulders’ pattern must be closed and a position in the direction of the current trend, that is, long, must be opened.
Unfortunately, neither Elder nor other technical analysts provide clear rules for determining targets when using the ‘Baskerville’s Hound’ pattern in trading. However, there should be no major difficulties here, since ‘Baskerville’s Hound’ is a trend continuation pattern, so targets and stop-loss orders can be calculated as in regular trend trading.
It is also worth mentioning an interesting effect inherent in the ‘Baskerville’s Hound’ pattern. It consists in the fact that the price moving in the direction opposite to what is expected by the technical analysis pattern (in our case, the ‘Head and Shoulders’) has increased potential.
The ‘Baskerville’s Hound’ pattern can continue not only an upward, but also a downward trend, arising from the ‘Inverted Head and Shoulders’ pattern with similar formation principles.
The trend continuation pattern ‘Baskerville’s Hound’ remains one of the most controversial patterns in technical analysis on the Forex market. Nevertheless, despite the debates among theorists, the pattern exists and works quite well, giving the trader the opportunity to avoid losses by opening a position in the trend in time.
Other Technical Analysis Patterns on Forex
- Cup with Handle – A Profitable Pattern for an Upward Trend
- Pattern ‘Bow Tie’ – A Trend Reversal Pattern
- Head and Shoulders: Features of Construction and Trading on Forex
- <a title=”Trend Reversal Pattern Diamond or Rhombus: A Dangerous Signal for a Trader” href=”https://fortraders.org/price-pattern-teh-analyse/pattern-brilliant-ili-romb-opasnyj-signal-dlya-trejdera
FAQ
What is the ‘Baskerville’s Hound’ pattern?
It is a trend continuation pattern described by Alexander Elder, resembling an unsuccessful ‘Head and Shoulders’ pattern where the price continues in the original direction instead of reversing.
How is the pattern identified?
The pattern forms when the price breaks above the high of a ‘Head and Shoulders’ pattern, indicating a false breakout and continuation of the prior trend.
How is it used in trading?
Traders close short positions and open long positions when the price exceeds the high of the ‘Head and Shoulders’ pattern, following the continuation of the trend.
