T
he head and shoulders chart pattern is a reversal pattern that usually shows bullish to bearish kind of reversal. It has been seen often in uptrends.
Head and shoulders is also known for dandruff reversals as well, but we will talk about dandruff reversal some other time.
Let’s stick with this one for now and see how this head and shoulder pattern looks like.
Head and Shoulders
Head and shoulders chart pattern is formed by a large peak(head), which has a slightly smaller peak(shoulders) on either side of it.
Usually, the first and third peak will be lower than the second, but they all have the same level of support, otherwise known as the ‘neckline’.
A “neckline” is drawn by connecting the lowest points of the two troughs.
Once the third peak has fallen back to the level of support, it is likely that it will breakout into a bearish downtrend.
The slope of this line can either be up or down, but it is considered that when the slope is down, it produces a more reliable signal.
Can you see the head and shoulders pattern?
The second peak you see is the head of the pattern, which is the highest point.
There are two other peaks, which are the shoulders, but they are smaller than the head.
NOTE: If we have such formation, we will place an entry order below the neckline.
What else you can get out of this chart pattern is a calculation of how far the price can move after it breaks the neckline.
You will notice that the once the price went below the neckline it not only made a move that is at least the size of the distance between the head and the neckline, but also it did go further down.
But let’s not be greedy monsters, because this can easily turn out to be a bad joke, so we can’t be sure where the price will go after the level of the neckline.
Inverse Head and Shoulders
It is the same as a head and shoulders formation, but if you take it upside down.
This chart consists of a one really LOW valley (head), followed by two HIGHER but still low valleys (shoulders).
It has been seen in extended downward movements.
In the example above you can see that this is just a flipped head and shoulders pattern.
If we find such a formation, we would place a long entry order above the neckline and our target can be calculated by measuring the distance between the head and the neckline, just like the head and shoulders pattern.
The distance will approximately show how far that the price will move after it breaks the neckline.
The price moved up where you predicted to move after it broke the neckline, so you made some good profits by hitting that target.
You will like what we are about to say. There are some sweet trade management techniques, which will allow you to lock in your profits, while you keep your trade open in case the price continues to move in your direction.But we will talk about them later on.
Now, jump onto the next chart pattern.
