HEAD AND SHOULDER PRICE PATTERN
Head and Shoulder pattern is a Price Action trading pattern that appears with three tops or peaks on the trading chart.
Basically, the two shoulders are almost of the same height while the head is usually higher than other tops.
Technically, Head and Shoulder pattern shows trend change from a Bullish trend to a Bearish trend.
In essence, Head and Should pattern is a Trend Reversal Price Action pattern.
It is very reliable and mostly accurate when it comes to forecasting price direction.
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The image below shows an example of Inverted Head and Shoulder Price Pattern.
HOW TO IDENTIFY HEAD AND SHOULDER PATTERN
The most sought after trading strategy by newbies (new traders) will be a simple and effective trading strategy.
Head and Shoulder pattern is simple and effective.
However, this trading pattern is similar to Triple Top price pattern.
Primary difference between Head and Shoulder price pattern and Triple top pattern is as follows;
Phase one: Head and shoulders pattern forms when price rises to a top and then subsequently falls back to the starting point.
Second Phase: Price rises above the previous peak to form the second peak, and drops back to the starting price level.
Phase Three: Price rises for the third time, but reaches the top level of the first peak (Phase One Peak) before dropping to the base (neckline) of the pattern.
Two equal bottoms are visible at the neckline plus a clear breakout of the neckline.
- Head and shoulder pattern has fiver features:
- Left shoulder
- Right shoulder
- Price movement
Step 1: Price Movement
The very first part of Head and Shoulder price pattern is the movement of price an uptrend.
Normally, the movement of price spans several pips in an uptrend, and leads to a price retracement along the line.
There are instance where price movement in an uptrend results to complete price reversal.
In other instances, price do not only reverses, but continues in extension.
Step 2: Left Shoulder
Left Shoulder forms when price rises to form a peak (Higher High), and retraces to continue in an uptrend.
A prevailing Bullish trend is visible on the left side of the chart at the beginning of the formation of the Left Shoulder.
This is the first phase where price drops from the top (Higher High) to form a low (Higher Low).
Step 3: Head
Head forms when price moves from a low (Higher Low) and rises to the top (Higher High) before dropping to the next low (Higher Low).
This is the Second phase in the Head and Shoulder formation.
The neckline is visible after the Head is completely formed.
Step 4: Right shoulder
Right Shoulder forms at the beginning of a downtrend formation.
However, Right Shoulder forms when price moves from a low level that price drops to, (after the formation of Head) and rises to the top (Lower High) before dropping to the previous low level.
It is an indication that the Bulls (Buyers) are losing control of price and that price trend is about to change.
Step 5: Neckline
At this point, we have an outlined Head and two Shoulders.
Subsequently, we can connect the lows to form the neckline.
Price Breakout and close below the neckline level is the point where traders step in to make short trades.
However, there are scenarios where price breaks the neckline, retest the neckline zone, then continues its movement downward.
Head and Shoulder pattern is a reliable price action strategy.
An example of a Trend Reversal strategy is the Head and Shoulder pattern.
It signals that trend change is about to occur.
In essence, market price forms two consecutive lows, separated by a temporary higher price rally.
Moreover, the second top is the highest (the Head) while the first and the third peaks are slightly lower (the Shoulders).
The final descent after the third peak signals that the Bullish trend has come to an end and Bearish trend has started.
However, at this point, the Bears have taken control of price.
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