Introduction to Chart Patterns

Head and Shoulders

By March 17, 2016 December 1st, 2018 No Comments

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Technical analysis is based on the belief that even in the stock market, history is destined to find itself repeated. Unlike in the fashion industry, this assumption is good for analysts, because it allows them to make high probability predictions about how a stock is likely to behave in the future, based on how it has behaved in the past..

The head and shoulders pattern is one of the chart movements that are most popular in technical analysis. Head and shoulders is considered to be a reversal chart pattern, which means that when it has completely formed, analysts will know that the security is likely to move in a direction that is opposite to the prior trend. There are two common types of head and shoulders patterns. Head and shoulders top is a bearish pattern that forms when a security is at the high of an upward trend, and indicates that the increase in price is soon to end. The head and shoulders bottom pattern, which is also referred to as the inverse head and shoulders is less common than head and shoulders top, and usually signals a bullish reversal in a downtrend..

Both head and shoulders patterns are similar in their makeup and only differ in the direction of the preceding trend. Each head and shoulders pattern has four main parts, called the two shoulders, head and neckline. The shoulders are small spikes or drops in price on either side of a decisive spike or drop. Because strong upward trends are made up of successive rising highs and rising lows, the appearance of the head and shoulders chart pattern indicates a trend is weakening because the successive movements of highs and lows are deteriorating.