فصل 5 Head and Shoulders Pattern
A head and shoulders top pattern is also a bearish reversal formation, which is formed in a uptrend. It is formed by two peaks (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). The head is the second peak and is the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head. A “neckline” is drawn by connecting the lowest points of the two troughs.
In the daily chart, we can understand the strong battle between bears and bulls. Smaller buyers push prices upwards making new higher; however the sellers overrun the buyers, and make a price retreat in the left shoulder. In the head, buying pressure exert a considerable influence, pushing the price higher than previous high. However, it is succeeded and surpassed again and hit a downtrend, only to find support again. In the right shoulder, The bulls push higher again, but this time fail to make a higher high. This is very bearish, because bears did not allow the bulls to make a new higher or even an equal high. The bears push prices back to support level.
The traders should open a short trade, once the head and shoulders breakout. Obviously, the H&S pattern, like any other pattern, does not provide a 100% success rate, so we must protect our trading account in case price moves against us. The optimal place for your stop loss order is above the second shoulder on the chart. After a few days, the price reaches our minimum target, but we stay with our short position until our bullish signal develops.
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