Head and Shoulders Pattern (H&S) / (Reversal of The Movement)

Today we are looking closer at one of our favourite patterns - Head & Shoulders pattern


Description - This pattern has three peaks, with the middle being the highest (head) and the two others (shoulders) being lower and roughly equal.

Left Shoulder: After an uptrend, the price creates a new high and then falls back to a new support level (which is also called a neckline zone).
Head: The subsequent rally surpasses the high of the left shoulder, forming the peak of the head, before declining back to the same support level, known as the neckline.
Right Shoulder: A final rally occurs, but this time it fails to reach the height of the head, forming the right shoulder. The price then falls back to the neckline once more.

Why do people use it?
This one Indicates a potential reversal of an uptrend where "Head" formation will be the starting point of weakness on the particular coin.


After the breakdown, it is common to place stoploss above the "Right-Shoulder" where the target is estimated by the starting point of the pattern (when there is no clear starting point, people also use measuring the vertical distance from the top of the head to the neckline and then projecting that distance downward from the point where the breakdown occurs)

Re-tests to neckline zones can happen, but they are not mandatory. As we know, with every breakdown/breakout prices like to go for a re-test to that same broken zone


How to Trade Chart Patterns??
Trading chart patterns involve more than just recognition. Here are some tips:

Confirmation: Wait for a breakout or breakdown for confirmation before making a trade (and be ready for a potential re-test in that same breakout or breakdown zone).
Volume: Look for increased or decreased volume as a sign of strength or weakness in the pattern's prediction.
Stop-Loss Orders:Use stop-loss orders to manage risk; they are crucial during these kinds of patterns as there can be some fakeouts.