• February 28, 2017 at 3:27 pm #1367

    Head and shoulders patterns are technical analysis chart patterns that form in trending markets, potentially signaling the end of a trend and a reversal is underway. A head and shoulders top pattern occurs in uptrending markets, whereas a head and shoulders bottom pattern occur in a downtrending market.

    The head and shoulders top pattern is fully formed when three successive peaks are formed, with the middle peak (the head) being at the highest point, and the two outside peaks (the two shoulders) being lower than the high, but at (roughly equal), near the same prices. Because of its reliability, past performance and easability to spot the head and shoulders pattern is one of the most popular technical patterns.

    head and shoulders top pattern

    The neckline of a head and shoulders pattern is key to identifying it and trading it. A trend line is drawn along the bottom of the two troughs between the three peaks and forms a “neckline”. When price closes below the neckline a breakout often occurs, confirming the head-and-shoulders top pattern as a valid. If the left shoulder’s peak is higher than the peak of the right shoulder, the breakout to the downside can be more significant.

    The inverse of a head and shoulders top pattern is the head and shoulders bottom pattern, or inverse head and shoulder, where the chart pattern is just flipped – so instead of an uptrend this pattern develops in a downtrend.

    head and sholders bottom pattern

    The pattern confirms when price closes above the down-sloping neckline in a 3 three valley pattern, with the middle valley below the others.

    A popular method of computing the potential target of a successful head and shoulders pattern top pattern breakout is by measuring price from the top of the head directly down to where price meets the base of the neckline, and subtracting that amount from where price breaks from the neckline, below the right shoulder. For head and shoulders bottom patterns(in a downtrend) the inverse is calculated – measure from the lowest point (the head) and add that figure to the breakout of the trend line from the right shoulder for an initial price target.

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