HEAD and SHOULDERS PATTERN
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The most famous figure of technical analysis in the world. It consists of three tops, where the middle one is the highest. Accordingly, two shoulders and one head. The neckline in this case connects the two minimum values of the extreme top.
✳️ Pattern Breakdown
The Head & Shoulders pattern is a common psychological pattern of market players that hasn't changed for decades. Each new price is the result of bulls and bears struggle, but on the relatively long-time interval this struggle gets the more correct recognizable form. Since all traders see the same chart, their behavior is synchronized when a familiar pattern is identified the emotion factor kicks in.
The pattern itself consists of three parts a high peak in the middle and two smaller peaks on the sides. Thus, the first and the second tops form shoulders of the pattern, while the peak in the middle is the head. Support line drawn on the pattern minimum is also a signal line. is also a signal line - its breakdown defines the change of the trend? The first small peak and the subsequent fall mean the weakening of the upward impulse the loss of the bulls' enthusiasm.
However, maintaining the momentum, the price continues to move upwards, forming a higher maximum. At this stage there is still the possibility of a continuation of the bullish movement. But as soon as the price goes down to the previous low, the future development is already predetermined. The bulls make one last attempt to go up, but the price usually only reaches the nearest resistance level, the level of the first peak, and then it has to wait for the support level to be broken down to enter the downside.
There is also an inverted Head & Shoulders pattern that creates a buy signal. In this case instead of three peaks we have three lows, with the lowest one in the middle. The pattern signals completion of the downtrend and formation of a new movement direction.
✳️ Application in practice
Having received a signal about the formation of a new pattern, the first thing we need to determine is the presence of a continuous unidirectional movement. Further, having determined that the trend is bullish, we wait for the formation of a pattern. At the beginning of formation of the second arm we draw a support line by the swing minimums. This will be a signal line, breakthrough of which will indicate a price reversal.
It is necessary to enter the market after breaking through the support level. Confirmation is the closing of the candle behind the level at the opening of the next one, we open a market order to sell. Stop loss is placed just above the peak of the second shoulder. In some cases, the price may try to test the nearest resistance level again, and this moment should be taken into account when setting a stop.
✳️ Conclusion
Head and Shoulders is a time-tested figure, which, if identified correctly, allows you to enter the market at the beginning of a long-term trend. All you have to do is analyze the set-up and make a final decision about entering the trade.
The most famous figure of technical analysis in the world. It consists of three tops, where the middle one is the highest. Accordingly, two shoulders and one head. The neckline in this case connects the two minimum values of the extreme top.
✳️ Pattern Breakdown
The Head & Shoulders pattern is a common psychological pattern of market players that hasn't changed for decades. Each new price is the result of bulls and bears struggle, but on the relatively long-time interval this struggle gets the more correct recognizable form. Since all traders see the same chart, their behavior is synchronized when a familiar pattern is identified the emotion factor kicks in.
The pattern itself consists of three parts a high peak in the middle and two smaller peaks on the sides. Thus, the first and the second tops form shoulders of the pattern, while the peak in the middle is the head. Support line drawn on the pattern minimum is also a signal line. is also a signal line - its breakdown defines the change of the trend? The first small peak and the subsequent fall mean the weakening of the upward impulse the loss of the bulls' enthusiasm.
However, maintaining the momentum, the price continues to move upwards, forming a higher maximum. At this stage there is still the possibility of a continuation of the bullish movement. But as soon as the price goes down to the previous low, the future development is already predetermined. The bulls make one last attempt to go up, but the price usually only reaches the nearest resistance level, the level of the first peak, and then it has to wait for the support level to be broken down to enter the downside.
There is also an inverted Head & Shoulders pattern that creates a buy signal. In this case instead of three peaks we have three lows, with the lowest one in the middle. The pattern signals completion of the downtrend and formation of a new movement direction.
✳️ Application in practice
Having received a signal about the formation of a new pattern, the first thing we need to determine is the presence of a continuous unidirectional movement. Further, having determined that the trend is bullish, we wait for the formation of a pattern. At the beginning of formation of the second arm we draw a support line by the swing minimums. This will be a signal line, breakthrough of which will indicate a price reversal.
It is necessary to enter the market after breaking through the support level. Confirmation is the closing of the candle behind the level at the opening of the next one, we open a market order to sell. Stop loss is placed just above the peak of the second shoulder. In some cases, the price may try to test the nearest resistance level again, and this moment should be taken into account when setting a stop.
✳️ Conclusion
Head and Shoulders is a time-tested figure, which, if identified correctly, allows you to enter the market at the beginning of a long-term trend. All you have to do is analyze the set-up and make a final decision about entering the trade.
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🔻FREE Telegram channel🔻
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t.me/DeGRAMForex
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