What Is Head and Shoulder Chart Pattern?
The head and shoulders pattern is a popular chart pattern consisting of three peaks, with the middle peak (the “head”) being higher than the two peaks on either side (the “shoulders”) that are used to identify potential trend reversals. It usually forms at the end of a downward and upward trend and the market trend can be determined by it.
The pattern is named after the appearance of the three peaks and looks like a human head and shoulders. The neckline is drawn across the two low points between the three peaks.
The key features of the Head and shoulders pattern are as follows:
The Head and shoulders consists of three peaks:
- The highest peak named “Head” is in the middle of the chart.
- The left side of the chart that named “Left shoulder” and is lower than the head.
- The peak on the right side of the chart that named “Right shoulder” and is lower than the head.
- The line they make by connecting two shoulders to each other is the neckline.
- The profit limit is equal to the distance from the peak to the neck
- The loss limit is slightly higher than the right shoulder in the upward trend and slightly lower than the right shoulder in the downward trend.
The concept of head and shoulder pattern:
When the price breaks below the neckline and hits the pullback, it confirms the pattern and suggests that the uptrend may be reversing. This is a sell signal and traders may look for short positions.
In addition to the standard head and shoulders pattern, there are also variations such as the inverse head and shoulders pattern, which is a bullish pattern that forms after a downtrend. The inverse head and shoulders pattern looks like a flipped version of the regular head and shoulders pattern, with the head being the lowest point and the shoulders being slightly higher.
It’s important to note that not all head and shoulders patterns will lead to a trend reversal, and traders should use additional technical analysis, such as volume or oscillators like the RSI or MACD to confirm the pattern before entering the market.