PRICE ACTION
• In an uptrend, price action finds first resistance (1) that forms left shoulder's high, where it reverse direction and goes downwards till finding support (2), completing the left shoulder formation.
• Price action reverses direction from that support (2) and goes upwards till finding second resistance (3) that forms head's high, where it reverses direction and goes downwards till finding support (4), completing the head formation.
• Price action reverses direction from the last support (4) and goes upwards till finding third resistance (5) that forms right shoulder's high, where it reverses direction going downwards.
• The pattern is completed when price action breaks the neckline at point (6) downwards.
NOTES
• Neckline is identified by drawing a trend-line connecting the two support levels that completed both the left shoulder and head formations, which are (2 - 4).
• Both shoulders don't have to be of the same height.
• Neckline can be skewed, usually to the same direction of the trend-line connecting both shoulders highs at points (1 - 5).
• Volume usually decreases as the pattern is being formed, and increases when breaking or retesting the neckline.
• This pattern is commonly found on medium and long-term time-frames.
TRADING THE PATTERN
• Trade entry: the pattern is traded after price action breaks the neckline at point (6), either with an entry after the breakout, or after a -possible- retest to the neckline which turned into resistance.
• Take profit: identified by measuring the vertical distance from head (3) to neckline, that measurement is then applied from the breakout point (6).
• Stop loss: can either be the neckline breaking rate (6), or the right shoulder's high (5).
• In an uptrend, price action finds first resistance (1) that forms left shoulder's high, where it reverse direction and goes downwards till finding support (2), completing the left shoulder formation.
• Price action reverses direction from that support (2) and goes upwards till finding second resistance (3) that forms head's high, where it reverses direction and goes downwards till finding support (4), completing the head formation.
• Price action reverses direction from the last support (4) and goes upwards till finding third resistance (5) that forms right shoulder's high, where it reverses direction going downwards.
• The pattern is completed when price action breaks the neckline at point (6) downwards.
NOTES
• Neckline is identified by drawing a trend-line connecting the two support levels that completed both the left shoulder and head formations, which are (2 - 4).
• Both shoulders don't have to be of the same height.
• Neckline can be skewed, usually to the same direction of the trend-line connecting both shoulders highs at points (1 - 5).
• Volume usually decreases as the pattern is being formed, and increases when breaking or retesting the neckline.
• This pattern is commonly found on medium and long-term time-frames.
TRADING THE PATTERN
• Trade entry: the pattern is traded after price action breaks the neckline at point (6), either with an entry after the breakout, or after a -possible- retest to the neckline which turned into resistance.
• Take profit: identified by measuring the vertical distance from head (3) to neckline, that measurement is then applied from the breakout point (6).
• Stop loss: can either be the neckline breaking rate (6), or the right shoulder's high (5).