Head and Shoulders Pattern
Technical Analysis of the Head and Shoulders Pattern
Head and shoulders pattern is a technical analysis term referring to a chart formation in which a price exhibits three successive rallies, the second one being the highest. Head and shoulders pattern is one of the most widely used and reliable chart patterns in technical analysis.
The pattern gets its name from the fact that on a chart the first and third rallies look like shoulders and the second looks like a head because it is the highest of the three. Head and shoulders pattern is believed by technical analysts to be a bearish indicator. It is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend.
Different Versions of the Head and Shoulders Pattern
There are two versions of the head and shoulders chart pattern—head and shoulders top and head and shoulders bottom.
Head and shoulders top is a chart pattern that is formed at the highest point of an upward movement and signals that the upward trend is about to end.
Head and shoulders bottom, also known as inverse head and shoulders, is the lesser known of the two, but is used to signal a reversal in a downtrend.
Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low.
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