Understand the Head and Shoulders Pattern

Understanding the Head and Shoulders Pattern in Technical Analysis

What is a Head and Shoulders Pattern?

On a stock or commodity chart, the head and shoulders pattern is a bearish reversal pattern. It is made up of three peaks, the centre peak being the highest and the other two being lower and about equal in height. The pattern is named from its resemblance to a human head and shoulders. The pattern suggests that the stock's price will reverse its present trend and fall.
The head and shoulders pattern is made up of several components, including the left shoulder, head, and right shoulder. The left shoulder is formed when the stock's price rises, followed by a decline, and then a subsequent rise to a level slightly below the previous peak. The head is formed when the stock's price rises again, followed by a decline, and then a subsequent rise to a level higher than the left shoulder. The right shoulder is formed when the stock's price rises again, followed by a decline, and then a subsequent rise to level equal to the left shoulder.

The significance of the Head and Shoulders Pattern

The head and shoulders pattern is significant because it signals potential trend reversal, which means that traders can use it as an opportunity to sell their long positions or short sell the stock. It is reliable pattern because it is relatively easy to spot on chart, and it has high success rate in predicting trend reversal. Moreover, the pattern is widely used by technical analysts and traders worldwide, making it a popular tool in the stock market.

Inverse Head and Shoulders Pattern

An inverse head and shoulders pattern is the opposite of  head and shoulders pattern, and it is bullish reversal pattern. It's formed by three lows, with the middle low being the lowest, and the other two lows being higher and roughly equal in height. Pattern indicates that the stock's or commodity price is likely to reverse its current trend and rise.

Conclusion

Summary, the head and shoulders pattern is a reliable bearish reversal pattern that signals a potential trend reversal in a stock's price. It is significant because it is relatively easy to spot on a chart, and it has a high success rate in predicting a trend reversal. Traders can use this pattern as an opportunity to sell their long positions or short sell the stock.