Technical Analysis Patterns (11) How to Trade Head and Shoulders Patterns

Technical Analysis Pattern (10) How to Trade Head and Shoulders Pattern

This head-and-shoulders chart pattern is a popular and easy-to-live pattern for technical analysis, which shows a baseline of three peaks, with the middle peak being the highest.The head and shoulders chart depicts a bullish-to-bearish trend reversal and indicates that the uptrend is coming to an end.

This pattern appears on all time frames and is therefore available to all types of traders and investors.Entry levels, stop-loss levels, and price targets make patterns easy to implement, as chart patterns provide important and easy-to-see levels.

Key Points

• A head and shoulders pattern is a chart pattern that appears as a baseline with three peaks: the outer two are close together and the middle is the highest.
• In technical analysis, a head and shoulders pattern describes a specific chart pattern that predicts a bullish to bearish trend reversal, while an inverse head and shoulders indicates a reversal.
• The head and shoulders pattern is considered one of the most reliable trend reversal patterns, but it has its limitations.

How to trade a head and shoulders pattern

What does a head and shoulders pattern look like

First, we'll look at the formation of a head and shoulders pattern, followed by an inverse head and shoulders pattern.

Pattern formation (seen at market top):

• Left Shoulder: The price rises first, then peaks, and then falls.
• Head: The price rises again to form a higher peak.
• Right Shoulder: Another drop, followed by a rise to form a right peak, below the head.

The formations are rarely perfect, which means there may be some noise between the respective shoulders and head.