What Is A Head And Shoulders Pattern?

 

A head and shoulders pattern is something that is employed in technical analysis. It is a specific chart pattern that shows a change from a bullish to a bearish trend. The pattern looks like a line with three peaks, two of which are about the same height and one in the middle that is the tallest.

The head and shoulders pattern is made when the price of a stock goes up to a peak and then goes down to where it started going up. The price then goes up above the previous peak, making the "head," and then goes down to the original base. Lastly, the stock price rises to about the same level as the first peak of the formation before falling back down.

The head and shoulders pattern is thought to be one of the best ways to tell when a trend will change. It is one of a few top patterns that show, to a greater or lesser degree, that a rising trend is about to end.

How To Figure Out The Head And Shoulders Pattern

There are four parts to a head and shoulders pattern:

• After a long time of going up, the price goes up to a peak and then goes down to a trough.
• The price goes up again, making a second high that is much higher than the first peak, and then goes down again.
• The price goes up a third time, but only to the level of the first peak. It then starts to go down again.
• The neckline, which is drawn between the two peaks or valleys (inverse).

The first and third peaks are the shoulders, and the second peak is the head. The neckline is the line between the first and second troughs.

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Inverse Head and Shoulders

An inverse shouldershead and shoulders chart, also called a head and shoulders bottom, is the opposite of a head and shoulders chart. It is the opposite of the head-and-shoulders bottom, which is used to predict a change in a downtrend. This pattern can be seen when the following things happen to the price of a security:

• The price drops to a low point, then goes back up.
• The price drops below the previous low, then goes back up.
• The price drops again, but not as far as the second trough.
• Once the last trough is made, the price goes up toward the resistance (the neckline) that is near the top of the previous troughs.
   

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What Can You Learn From The Head And Shoulders Pattern?

The head and shoulders pattern shows that a turn around could happen. Traders think that three peaks and valleys with a larger peak in the middle mean that the price of a stock will start to go down. The neckline is where traders who think the price will go down start to sell.

The pattern also shows that the new downward trend is likely to continue until the right shoulder is broken, which happens when prices move higher than the prices at the right peak.