Head and Shoulders Pattern: How to Trade

Head and Shoulders Pattern

According to some analysts, the head and shoulders pattern has a success rate of 85%, although these numbers should be taken with a grain of salt. Nonetheless, there’s no doubt that the head and shoulders pattern is among the most accurate and reliable charting patterns in technical analysis. For a regular head and shoulders chart, a more conservative approach involves waiting for a pullback to the neckline level after an upside breakout has occurred. A pullback is a temporary reversal in the price action of a security or asset that lasts for only a few consecutive trading sessions. The neckline is a line that connects the first and second troughs and it reflects either a level of resistance or support.

Head and Shoulders Pattern

The left shoulder forms when investors pushing a stock higher temporarily lose enthusiasm. The pattern is completed, giving a market reversal signal, when the price declines again, breaking below the neckline. The neckline, as depicted above, is the horizontal line that connects the first two troughs to one another. The profit target will not always be reached, so traders may wish to fine-tune how market variables will affect their exit from the security. The neckline is the point at which many traders are experiencing pain and will be forced to exit positions, thus pushing the price toward the price target. In the standard head and shoulders pattern , we connect the low after the left shoulder with the low created after the head.

Head and Shoulders Pattern – Technical Analysis

It’s very simple to identify this powerful reversal pattern. Chart patterns Understand how to read the charts like a pro trader. Technical analysts analyze momentum to try and identify price trends. The pattern has well-defined risk and profit-taking levels, which is https://www.bigshotrading.info/ excellent for beginners. We have already defined the neckline, but this is when it becomes crucial as it separates bulls from bears. In other words, if the price is breaking below this support line, then we can open a short position with a high degree of confidence.

Before you can trade it, you must first know the key attributes of the pattern. That way you can easily spot the most favorable head and shoulders to trade. Today I’m going to show you step-by-step how to trade the head and shoulders pattern.

Head and Shoulders Top

Meanwhile, you can plan your trade ahead of time and be ready to act when the price breaks the neckline. However, the target can also be impacted by several other factors, including previous support levels before the pattern, long-term moving averages, or the Fibonacci retracement levels. Next, the volume should ideally spike when the price forms the right shoulder and is about to break below the neckline. If the volume surges during the breakout, you can rest assured that the trend has reversed for good. The Head and Shoulders Pattern has several elements that make it unique and distinguishable on the chart. Understanding its components is crucial because you don’t want to confuse it with other chart formations. This article is very useful and made things easy for everyone.

  • A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal.
  • You can see that we started in an aggressive uptrend and finished the pattern in a downtrend, with the bears ultimately erasing more than half of the earlier gains.
  • This allows for greater confirmation that price action can sustain below that neckline.
  • There are three main components to the head and shoulders pattern.