What is a head and shoulders reversal pattern?
In most cases, when the price trend reverses, no matter whether it is long-to-short or short-to-long, there will generally be an identifiable reversal pattern on the market chart. Some chart patterns take shape quickly, while others take weeks to confirm a trend reversal.
The head and shoulders pattern is considered one of the most reliable major reversal patterns. It can be divided into two types: head and shoulders top and head and shoulders bottom. The head-and-shoulders top shape is separated by a main rising trend (ie the head) and two weak rising trends (shoulders) that are not necessarily the same. Connecting the bottoms of the two shoulders can draw a "neckline". Usually when prices close significantly below this neckline, the pattern is confirmed as complete.
head and shoulders
The head-and-shoulders pattern generally appears at the top of an uptrend and is a bearish reversal pattern that only reverses an uptrend. The composition of the form is like a standing person, and the trend before the form is like a human torso. On top of the torso form the left shoulder, head and right shoulder in turn.
When the price shows a strong upward trend, the trading volume increases with the upward trend. Then a primary decline occurred, and the trading volume decreased, which was the left shoulder. Afterwards, there was another uptick with huge volume, and after passing the top of the left shoulder, there was another decline with smaller volume. The price was close to the level of the bottom of the left shoulder, which was the head. The apex of the third rise could not exceed the top of the head, and the trading volume also decreased compared with the left shoulder and the top of the head, and then began to fall, which is the right shoulder. After falling from the top of the right shoulder and breaking through the bottom neckline connected by the bottom of the left shoulder and the bottom of the head, the stock price will fall at least as far as the distance from the top of the head to the neckline as the trading volume increases.
head and shoulders
The head-and-shoulders pattern generally appears at the bottom of a downtrend and is a bullish reversal pattern that only reverses a downtrend. This pattern is in the opposite direction to the head-and-shoulders pattern. The left shoulder first falls and then rises. The head falls more than the left shoulder and then rises back to the top of the left shoulder. The right shoulder has a small decline. After rebounding, it will break through due to the increase in trading volume. The neckline formed by the top of the left shoulder and the top of the head is a sign that the stock price is about to rise sharply, and the rise is at least the distance from the bottom of the head to the neckline.
A few explanations of the head and shoulders pattern
1. The height of the shoulders of the head and shoulders can be different. In fact, they are not equal in most cases, and the equality is just an accidental phenomenon. Similarly, the two low points or high points between the shoulder and the head are usually not equal, which means that the neckline is not horizontal in most cases, but a sloping straight line.
2. The head-and-shoulders pattern is sometimes a continuous consolidation pattern rather than a reversal breakthrough pattern. If the head-and-shoulders shape is used as a continuous finishing pattern, the time to form the head-and-shoulders shape is generally shorter.
3. The longer it takes for the formation of the head-and-shoulders shape, the greater the fluctuation of the price during this process. After breaking through the neckline in the future, the potential power of price reversal will be greater, and the law applicable to the head-and-shoulders shape will be more credible .
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