Head and shoulders, Head and Shoulders in English, is one of the most reliable reversal patterns that can be analyzed in technical analysis. When this pattern occurs the trader is faced with a trend reversal and a change in the market.
The head and shoulders formation is undoubtedly the most well known among traders, as well as the easiest to spot.
The formation of the head and shoulders, to be called such, needs 4 elements to occur:
- a initial relative maximum, which configures the left shoulder. Right now, investors have no clue that the head-and-shoulders pattern is forming;
- the final peak in the market for an uptrend phase forms the head instead. The more experienced traders at this point understand that they are facing a trend reversal and behave accordingly;
- the right shoulder is formed instead for the continuation of the purchase. Although at this point there are many warning signs, less experienced traders still continue to buy, contributing to the formation of the figure.
Arriving at the formation of the right shoulder, the price records a last moment of surge, due to the purchases of the traders. However, once it has reached the peak, it will drop steeply, heading towards the support level.
The figure of the head and shoulder is always characterized by the three maximum peaks that are reached. The second of these three peaks will be the largest and will form, as we said, the head of the figure.
This peak will be the peak price high, before the reversal that will take place shortly thereafter.
The head and shoulders pattern can occur with an uptrend, as we have illustrated above, or from a bearish formation. In this case the figure will be called inverted head and shoulders and will have the same shape as the bullish head and shoulders, but in an inverted way.
The three peaks in the reversed head and shoulder will obviously be reversed and will not indicate three point highs, but three point low, before the trend reversal.
Knowing this figure leads trader to enter the market at the right time. We therefore advise you to delve into this topic and read the contents in the dedicated section of Money.it.
