The Head and Shoulders pattern is a classic reversal formation that signals a potential change in trend direction. It’s composed of three peaks:

  • Left Shoulder: A price rise followed by a peak and then a decline.

  • Head: A higher peak than the left shoulder followed by a decline.

  • Right Shoulder: A rise similar to the left shoulder followed by a decline.

    The pattern is confirmed when the price breaks below the “neckline,” which is drawn by connecting the lows of the two troughs. This breakout suggests a bearish reversal.

How to Interpret This Pattern

  1. Identify the Pattern: Look for the formation of the left shoulder, head, and right shoulder on the price chart.

  2. Draw the Neckline: Connect the lowest points of the two troughs between the shoulders and the head.

  3. Wait for Confirmation: A break below the neckline with increased volume confirms the pattern.

  4. Set Price Targets: Measure the distance from the head to the neckline and subtract it from the breakout point to estimate the potential price decline.

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