A head and shoulders pattern is also a trend reversal formation.
It is formed by a Valley (left shoulder), followed by a Lower Valley (head), and then another Higher Valley (right shoulder).
A “Neckline” is drawn by connecting the highest points of the two Peaks. Neckline resistance does not need to be strictly horizontal.
This illustrates that the downward trend is coming to an end. When a Head and Shoulders formation is seen in a downtrend, it signifies a major reversal. The pattern is confirmed once the price breaches the neckline resistance. 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 above the neckline.
TARGET: We can also calculate a target by measuring the lowest point of the head to the neckline. This distance is approximately how far the price will move after it breaks the neckline.
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