The Head and Shoulders pattern is a technical analytical pattern on the price chart, which is often considered one of the most reliable trend reversal signals. It got its name because of the visual similarity with the head, shoulders and neck.The main features of the "Head and Shoulders" pattern include:
1. Head and shoulders: The pattern consists of three main components - the "head" (the highest peak), the "left shoulder" (the peak preceding the head) and the "right shoulder" (the peak following the head).
The head is usually the highest peak, and the shoulders are at adjacent lower levels.2. Neck: The neck is the support line connecting the two minimums between the head and shoulders.
Breaking the neck down is a sell signal, and breaking the neck up can be a buy signal.3. Trading Volumes: Trading volumes can play an important role in analyzing the "Head and Shoulders" pattern.
An increase in volume on the formation of the head and shoulders, as well as on the penetration of the neck, can confirm the strength of the pattern signal.How to use the "Head and Shoulders" pattern in trading:
1. Trend definition: The "Head and Shoulders" pattern is a trend reversal signal.
If the pattern appears at the end of an uptrend, it may be a signal of a possible downward reversal, and vice versa, if the pattern appears at the end of a downtrend, it may be a signal of a possible upward reversal.2. Confirmation of the signal: Confirmation of the signal of the "Head and Shoulders" pattern includes the penetration of the neck.
When the price breaks the neck in the direction opposite to the trend, it can be considered a signal to enter a position.3. Setting Goals and Stop Loss Levels: Traders usually use the "Head and Shoulders" pattern to determine the levels of goals and stop loss levels.
The target can be a level that corresponds to the height of the pattern, and a stop loss can be placed below the neck to protect against potential losses.It is important to remember that the successful use of the "Head and Shoulders" pattern requires practice, experience and additional confirmatory analysis.
Traders often combine this pattern with other tools and strategies to increase the reliability of signals and make informed decisions.