Head and Shoulders Pattern
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Head and Shoulders | |||||||||||||||||||
A head-and-shoulders pattern is also a trend reversal formation. | |||||||||||||||||||
It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). | |||||||||||||||||||
A "neckline" is drawn by connecting the lowest points of the two troughs. | |||||||||||||||||||
The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal. | |||||||||||||||||||
In this example, we can easily see the head and shoulders pattern. | |||||||||||||||||||
The head is the second peak and the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head. | |||||||||||||||||||
With this formation, we put an entry order below the neckline. | |||||||||||||||||||
We can also calculate a target by measuring it from the high point of the head to the neckline. | |||||||||||||||||||
This distance is approximately how far the price will move after it breaks the neckline. | |||||||||||||||||||
You can see that once the price goes below the neckline, it makes a move that is at least the size of the distance between the head and the neckline. | |||||||||||||||||||
We know you're thinking to yourself, "The price kept moving even after it reached the target." | |||||||||||||||||||
And our response is, "Don't be gritty!" | |||||||||||||||||||
Inverse Head and Shoulders | |||||||||||||||||||
The name speaks for itself. It is basically a head-and-shoulders formation, except this time it's upside down. | |||||||||||||||||||
A valley is formed (shoulder), followed by an even lower valley (head), and then another higher valley (shoulder). | |||||||||||||||||||
These formations occur after extended downward movements. | |||||||||||||||||||
Here you can see that it is just like a head and shoulders pattern, but it's flipped upside down. | |||||||||||||||||||
With this formation, we would place a long entry order above the neckline. | |||||||||||||||||||
Our target is calculated just like the head and shoulders pattern. | |||||||||||||||||||
Measure the distance between the head and the neckline, and that is approximately the distance that the pair will get after it breaks the neckline. | |||||||||||||||||||
You can see that the price moved up nicely after it broke the neckline. | |||||||||||||||||||
If your target is met, then be happy with your profits. | |||||||||||||||||||
However, there are trade management techniques where you can lock in some of your profits and still keep your trade open in case the price continues to move your way. | |||||||||||||||||||
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