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1. What is the Head and Shoulders pattern?
- A reversal pattern indicating a potential change in direction from bullish to bearish.
- It consists of three peaks:
- Left shoulder: first peak followed by a decline.
- Head: a peak higher than the shoulders followed by a decline.
- Right shoulder: a third peak lower than the head.
- The pattern is completed by breaking the Neckline, confirming the bearish signal.
2. How to trade based on the pattern:
- Enter a sell trade after breaking the Neckline.
- Price target: usually calculated by the distance from the head to the Neckline, then subtracted from the breakout point.
- Stop loss: placed above the right shoulder or head depending on the trader's strategy.
- The pattern is not 100% guaranteed, so it's preferable to use it with other indicators like RSI or MACD.
- The pattern may appear inverted (Inverse Head & Shoulders), indicating a bullish reversal.
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