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Head
and Shoulders
A head and shoulders
chart pattern is a major trend reversal formation. It is formed
by a peak, followed by a higher peak, and then another peak but
did not exceed the height of the second peak. A neckline or supporting
line is drawn by connecting the two lowest points. The slope of
this line can either be up or down. Usually the signal will be more
reliable if the trend line is facing downward.
How
to trade with Head and Shoulders pattern ?
 Go short
( sell ) at breakout below the neckline.
Place a stop-loss
just above the last peak.
After the breakout,
price often goes back to the neckline which then acts as a resistance
level. Go short on a reversal signal and place a stop-loss just
above the resistance level
How
to Confirm Head and Shoulders pattern ?
usually high
volume on the first peak ( 1st Shoulder )
Moderate trading
volume on the second peak ( Head )
Must lesser
trading volume on the third peak ( 2nd shoulder )
A
sudden increase in trading volume on the break out point below the
neckline
Trend line
must be going downward.
Reverse
Head and Shoulders
The reverse
Head and Shoulders pattern is same as the Head and Shoulders formation
mentioned earlier, except this time it’s in reverse. A 1st
valley is formed followed by an 2nd lower valley and then another
higher valley.
How
to trade with Reverse Head and Shoulder pattern
?
Go long
( Buy ) at breakout above the neckline.
Place a stop-loss
just below the last trough.
There
is frequently a correction back to the neckline, which then acts
as a support level. Go long on a reversal signal and place a stop-loss
just below the support level.
How
to confirm Reverse Head and Shoulders pattern ?
Usually high
trading volume on the first trough
Moderate trading
volume on the second trough
High trading
volume on the second peak
Low trading
volume on the third trough
A sudden increase
in trading volume at the breakout
Trend line
must be going upward.
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