In this article, We learn about “Head and Shoulders “.Let’s Go!
Head and Shoulders is a chart pattern described by three peaks, with the outer two peaks being of similar height and the middle being the highest.
This is a bearish reversal chart pattern that begins with an uptrend with two higher highs (1 and 3) and two higher lows (2 and 4), forming a “left shoulder” and “head”.
Point 5 forms a lower high below points 3 and 1, which forms the “right shoulder”.
This indicated that the uptrend was coming to an end, although a reversal was confirmed when price broke below the “neckline” at point 6 and crossed downward through the previous low at point 4.
The pattern is confirmed once price breaks through the neckline support (2 and 4).
It’s also worth watching if entry point 3’s rise is less steep than entry point 1’s, and if entry point 5’s rise is less steep than point 3’s rise.
If this does happen, it would indicate that bulls are becoming less aggressive and the upward momentum is losing steam, increasing the likelihood of a reversal.
The Head and Shoulders chart pattern is considered by many traders and analysts to be one of the most reliable and accurate of all reversal chart patterns.
In summary, the Head and Shoulders pattern essentially represents:
- Bounce back to new highs
- then dropped, then
- Clear uptrend forming higher highs
- second drop, and
- One last rally to create another higher high, but failed.
The line connecting the bottom, often called the “neckline,” does not need to be strictly horizontal.
The slope of the
neckline is also an important indicator:
- If the neckline slopes downward, it is bearish as price forms a lower low before the right shoulder.
- If the neckline slopes upward, it indicates bullishness as price formed a higher low before the right shoulder.
When a head and shoulders pattern occurs in an uptrend, it signals a major reversal.
The strength of this reversal, measured by the amount of decline after the breakout, is directly proportional to the amount of advance that preceded the pattern
The stronger the previous trend, the more likely it is that a more dramatic reversal will occur.
Volume is usually highest on the left shoulder, but is most likely to be exhausted at the breakout point. An upward trend in trading volume is more favorable.
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