The head and shoulders chart pattern is a price reversal pattern that helps traders identify when a reversal may be underway after a trend is exhausted. It is of two types: Head & Shoulder and Inverse Head & Shoulder. This reversal could signal an end of an uptrend or downtrend. (Inverse Head & Shoulder with an end to downtrend in this case)
Inverse Head & Shoulder:
An inverse head & shoulder pattern is comprised of three main components:
-After a long bearish trend, the price falls to a trough and subsequently rises to a peak
-The price again falls to form a second trough substantially below the initial low and rises again to the same peak
-The price falls for the third time but to the level of the first trough only before rising back to the same peak again
In this chart pattern there are three trough in which a large trough (the head i.e. the second trough) has a slightly smaller trough on either side of it (right and left shoulder that are the first and third peak), with all of the trough increasing to a same level of resistance i.e. the peak until where all the troughs had risen, called as neckline in the pattern.
Once the third trough (right shoulder) moves back to neckline it is likely to breakout to a bullish uptrend indicating a trend reversal hereby, which is the basic explanation of Head and Shoulder.
Traders can use Inverse head and shoulder to buy when the breakout is observed i.e. at the neckline after the right shoulder reached there completing the Inverse Head & Shoulder formation. For confirmation traders can use the drop in volume as the Inverse Head & Shoulder is forming and a sudden increase in the volume as breakout is observed suggesting a shift from sellers before the pattern to buyers after the pattern.
There are few limitations as well to the Head & Shoulder Pattern:
-Sometimes false breakouts might be observed
-The time duration for formation of the pattern might be too long
-Trough or peak might be pretty far from the neckline resulting in large stop loss distances which might have o reviewed consistently
-The price may see pullback after the third peak or trough often confusing few traders
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- Mudrex
Inverse Head & Shoulder:
An inverse head & shoulder pattern is comprised of three main components:
-After a long bearish trend, the price falls to a trough and subsequently rises to a peak
-The price again falls to form a second trough substantially below the initial low and rises again to the same peak
-The price falls for the third time but to the level of the first trough only before rising back to the same peak again
In this chart pattern there are three trough in which a large trough (the head i.e. the second trough) has a slightly smaller trough on either side of it (right and left shoulder that are the first and third peak), with all of the trough increasing to a same level of resistance i.e. the peak until where all the troughs had risen, called as neckline in the pattern.
Once the third trough (right shoulder) moves back to neckline it is likely to breakout to a bullish uptrend indicating a trend reversal hereby, which is the basic explanation of Head and Shoulder.
Traders can use Inverse head and shoulder to buy when the breakout is observed i.e. at the neckline after the right shoulder reached there completing the Inverse Head & Shoulder formation. For confirmation traders can use the drop in volume as the Inverse Head & Shoulder is forming and a sudden increase in the volume as breakout is observed suggesting a shift from sellers before the pattern to buyers after the pattern.
There are few limitations as well to the Head & Shoulder Pattern:
-Sometimes false breakouts might be observed
-The time duration for formation of the pattern might be too long
-Trough or peak might be pretty far from the neckline resulting in large stop loss distances which might have o reviewed consistently
-The price may see pullback after the third peak or trough often confusing few traders
----------------------------------------------------------------------------------------
If you find the post useful, please like and share our ideas with the community!
- Mudrex
