Reversal Chart Pattern: Head and Shoulders
Head and Shoulders patterns are one of the most reliable trend reversal patterns and are usually seen in upward trends, which are also called Head and Shoulders Top (although not top names are okay), although they can also appear in downtrend, where they are also called as Inverted Head and Shoulders (Inverted HnS). Since both of these patterns are trend reversal patterns, Head and Shoulders patterns require existing trends.
Head and Shoulders (HnS) pattern is formed when higher higher level on the uptrend followed by lower high level. The result is a series of three peaks where the center of the summit (the center) is the head, higher than the two tops (right side left) called shoulders on either side. Both shoulders (shoulders) do not need to have the same size or height not the same, but should be lower than the head (head).
A line through two valleys on either side of the head forms a neckline. If this line is broken down by the price then this movement will complete the Head and Shoulders pattern and signal the entry to sell. The neckline does not need to be a horizontal line, but the pattern will be weaker if the neckline angle is pointing upwards (trend line) in the direction of the uptrend.
If the price breaks through the neckline, there is often a rebound as the price tests the neckline again but at low volume. This is a second chance to sell. It is possible to precede the Head and Shoulders pattern entry signal by placing the sell position order after the right shoulder reaches its peak with stop loss placed on the head, but this is a high risk trading and therefore not highly recommended.
Head and Shoulders patterns give price projections measurable or clear price targets. This is measured by taking the distance or head height to the neckline and reducing it from the neckline at the breakout level.