How to identify and trade HEAD and SHOULDERS Chart Pattern?
The head and shoulders pattern is a reversal pattern that signals the end of an uptrend and the beginning of a downtrend. It is formed by three successive peaks, with the middle peak (head) being the highest and the two adjacent peaks (shoulders) being lower. The pattern is completed by a neckline, which is drawn by connecting the lows of the two shoulders and acts as a support level.
When the price of the asset breaks below the neckline, it is considered a confirmation of the head and shoulders pattern and signals a potential sell signal for traders. Some traders may prefer to wait for a retest of the neckline to confirm the validity of the pattern before entering a trade.
The downward move after the neckline break is often measured by projecting the distance from the head to the neckline down from the neckline break point, giving traders a price target for the potential move.
It is important to note that the head and shoulders pattern is not always a perfect and symmetrical formation, and there can be variations in the pattern's shape. Additionally, traders may also use other technical analysis tools, such as volume and moving averages, to confirm the validity of the pattern and make trading decisions.
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