A head and shoulders pattern is also a trend reversal formation. It is formed by a peak (left shoulder), followed by a higher peak (head), and then another lower peak (right shoulder). A “Neckline” is drawn by connecting the lowest points of the two troughs. Neckline support does not need to be strictly horizontal.
. This illustrates that the upward trend is coming to an end. . When a Head and Shoulders formation is seen in an uptrend, it signifies a major reversal. . The pattern is confirmed once the price breaches the neckline support
In this example, we can easily see the head and shoulders pattern.
How to Trade the Head and Shoulders Pattern:
ENTRY: we put an entry order below the neckline.
TARGET: We can also calculate a target by measuring the high point of the head to the neckline.
This distance is approximately how far the price will move after it breaks the neckline.