Head and shoulders
Traders and analysts constantly study trends and patterns as they monitor the market, hoping to detect the next most likely price fluctuations. Recognizing and correctly identifying patterns and understanding their implications are essential to a successful transaction. Head and shoulder patterns are important because of their long history of credibility among market analysts. The following details this pattern and explains what it means and how you can benefit from its use.
Head and shoulder pattern basics
From a technical analysis point of view, the head and shoulder pattern is usually the formation of a forecast chart showing a reversal of the trend of the market shifting from bullish to bearish and vice versa. This pattern has long been welcomed as a reliable pattern for predicting a trend reversal. Before moving on, it's important to remember that the head and shoulder patterns are rarely perfect. This means that slight price fluctuations can occur between the shoulders and head, and patterns are rarely perfectly formed in their appearance.
The head and shoulder pattern consists of three main components. Please check the image below before explaining each part.
This image clearly shows the three parts of this pattern. Two shoulder areas and the main area where prices move when creating patterns that indicate market reversals. The first "shoulder" is formed when the price rises and then falls into the valley after a significant period of bullishness in the market. Then, when the price rises again, a "head" is formed, creating high spikes above the level of initial shoulder formation. From this point on, the price goes down, creating a second shoulder that usually looks like the first shoulder. It is important that the first decline is not significantly below the level of the first shoulder, usually before a slight upward revision or flattening of price volatility.
The pattern is perfect and indicates a market reversal when prices fall again below the neckline. As you can see in the picture above, the neckline is the horizon connecting the first two troughs.