The Head and Shoulders pattern is one of the most famous technical analysis patterns, and it is used to predict a reversal in the price trend of a financial asset. It is divided into two types:
1. Regular Head and Shoulders – indicates a reversal from an uptrend to a downtrend.
2. Inverse Head and Shoulders – indicates a reversal from a downtrend to an uptrend.
Components of the pattern:
Left Shoulder: A peak that forms after an uptrend and then the price declines.
Head: A peak higher than the left shoulder, followed by another price drop.
Right Shoulder: Another peak, but lower than the head, followed by a decline.
Neckline: A support/resistance level that connects the two troughs formed between the shoulders and the head.
Trading method using the pattern:
In the regular pattern: A break of the price below the neckline is a sell signal, and the distance between the head and the neckline is measured to determine the price target.
In the inverse pattern: A break of the neckline upwards is a buy signal, using the same principle of measuring the price target.
Strengths and weaknesses:
✅ Reliable in highly liquid markets.
✅ The larger the trading volume at the break, the more credible the pattern.
❌ It may fail if there is no confirmation with trading volume or if the break is false.
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