Head and Shoulders Pattern

Head and Shoulders Pattern

The Head and Shoulders Pattern is a technical analysis chart formation that indicates a reversal in trend. It typically occurs at the end of an upward price trend and consists of three peaks: the first is a smaller peak (the left shoulder), followed by a higher peak (the head), and then another smaller peak (the right shoulder) that is similar in height to the left shoulder. The pattern is considered complete when the price breaks below the neckline, which is drawn through the lowest points of the two troughs between the shoulders.

Examples

• Example 1: A Stock trading at $50 reaches a peak of $60 (left shoulder), then rises to $70 (head), and finally drops to $55 before forming another peak at $60 (right shoulder). If it breaks below the neckline at $55, it signals a potential downward trend.
• Example 2: An Asset rises from $30 to $45, forms a left shoulder at $40, peaks at $50 for the head, and then forms a right shoulder at $40 again. A break below the neckline at $35 indicates a reversal.

Cases

• Case 1: A technology Stock experiences rapid growth, forming a head and shoulders pattern. Investors who recognize the pattern may sell their holdings to avoid losses as the Stock begins to decline.
• Case 2: A commodity that has been in a Bullish trend forms a head and shoulders pattern. Traders who anticipate the reversal might short the Asset after it breaks the neckline, Capitalizing on the downward movement.