Head and Shoulders Pattern Top Works Analysis (Trading Strategy)

The Head and Shoulders Pattern is a chart formation that appears as a baseline with three peaks. Here outside two are close in height. The middle is at the highest point. The chart formation predicts a bullish-to-bearish trend reversal. The pattern is believed as the most reliable trend reversal pattern. It is several top patterns that signal with varying degrees of accuracy as the upward trend is near to its end. Ahead and shoulder pattern is comprised of three components as after a long bullish trend the price rise to a peak and declines to form a trough. The price rise forms a second high above the initial peak then declines. The price rises a third time but the level of the first peak before declining. The first and third peak is called as shoulders. Then the second peak forms ahead.

The line that connects the first and second trough is called the neckline. The inverse head and shoulder pattern is a reliable indicator that signals a downward trend. It is about to reverse into an upward trend. The stock price reaches three consecutive low which is separated by temporary rail. The second trough is the lowest and the first and third is shallower. Then rally after the third dip signals that the bearish trend has reversed and the price is likely to keep rallying upward. The head and shoulders pattern is believed as a reliable trend reversal pattern.

How do you trade head and shoulders chart patterns

Traders wait for the pattern to complete. The pattern may not develop at all and the developed pattern may not complete in the future. In the head and shoulders pattern, we wait for price action to move lower than the neckline after the peak of the right shoulder. Here we wait for price movement above the neckline when the shoulder is formed. A trade can be initiated when the pattern complete. We plan the trade beforehand, writing down the entry, stops, and profit targets as well as noting any variable that will change your stop. The entry point is when a breakout occurs the neckline is broken and trade is taken. Entry point requires more patience and comes with the possibility that the move may be missed. This method involves waiting for a pullback to the neckline after a breakout that has occurred.

Attributes

Breakout Confirmation : The confirmation for the pattern is when there is a close below the lower trend line that draw horizontally across the intervening low with above-average volume.

Measuring :It will take the distance between the first low to the top head. It will subtract the amount from the neckline on the breakout.

Volume : The volume increases at the upward formation of the initial shoulder. It is diminishing as the price drops exiting the left shoulder. The volume will balance out during the creation of the head to increases again as the price breaks down below the bottom support level.

Conclusion

Head and shoulders tops and bottoms are called reversal chart patterns. This pattern is one of the most reliable technical formations. The pattern will reverse a bearish trend to bullish. It will identify the formation, neckline, and stop-loss level. It opens position when the price breaks through the neckline. The pattern will place a stop-loss order on the edge of the last shoulder. The head and shoulder top pattern is a recognizable technical chart. The left and right shoulder should be at the same height and width. They may be slightly staggered as it is important to understand that the pattern occurs after an uptrend. It will learn more about stock chart patterns and take advantage of technical analysis to the fullest.

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