A head & shoulders pattern is a reliable pattern from technical analysis that predicts a reversal in the trend.
The name is due to the pattern that occurs on the course. These are three peaks of which the two outermost peaks are lower than the middle one.
The two outer ones are, as you can see, the shoulders and the middle peak the head. Check out the photo below.
This pattern can be recognized on every timeframe. The larger the timeframe (4 hours, 1 day, 1 month) the greater the reversal in the trend will be. After the two shoulders and the head, there is another important aspect that we must take into account.
This is the neckline. The two shoulders on the course often occur from the same point. Check out the photo below.
Here we added the neckline. You can see that the right shoulder has risen at about the same point as the left shoulder. When you draw a trendline between these two starting points, you have a neckline.
After you see a head & shoulders pattern, analysis comes to the point that you can respond to this. A drop BELOW the neckline gives a trigger for a trend reversal.
As soon as the price falls below the neckline after forming the second shoulder, this indicates that the price is likely to fall further.
Reverse head & shoulders
The head & shoulders pattern also has an inverted version. In that case, the two shoulders are higher than the center piece (head) and the pattern is at the bottom of a course instead of the top. Check out the picture.
After a downtrend, the price forms the head & shoulders pattern at the bottom of the price and then rises back up over the neckline at the top. The result of this is an uptrend.
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