The Series of Chart Patterns Chapter 3: “Head & Shoulder Bearish Pattern”

What is Head & Shoulder chart pattern?
A Head & Shoulder pattern is a chart pattern used in technical stock analysis that predicts a Bullish- Bearish trend reversal. It is believed to be one of the most reliable trend reversal pattern. It consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline.

Many traders believe that looking at the price pattern alone does not give the whole picture and that volume also plays a key role in helping determine if the pattern is valid.
How does it work?
The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance.
Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high.
(This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline.
How to Trade with Head & Shoulder Bearish pattern?
  • The stock price must be in the uptrend.
  • Volume analysis is important when using the Head & Shoulders chart pattern
  • Volume during the advance of the left shoulder should be higher than during the advance of the head.
  • Volume should increase on the decline from the peak of the head, then decreases during the advance of the right shoulder.
  • Final confirmation comes when volume further increases during the decline of the right shoulder.
  • Enter when price breaks below the neckline
  • The distance down from the neckline. Place your target limit order there.
  • The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken.

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