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 consist 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 Bullish Pattern is generally regarded as a reversal pattern and it is most often seen in downtrends. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance. Buyers come in at the lows (left shoulder) and the upside is probed (beginning neckline.) Sellers soon return to the market and ultimately push through to new lows (head.) However, the new lows are quickly turned back and the upside is tested again (continuing neckline.) Tentative selling re-emerges and the market rallies downwards once more, but fails to take out the previous low. (This last top is considered the right shoulder.) Selling dries up and the market tests the upside yet again. New buying comes in and previous sellers get out. The pattern is complete when the market breaks the neckline.
How to Trade with Head & Shoulder Bullish pattern?
· The stock price must be in the downtrend.
· Volume analysis is important when using the Head & Shoulders chart pattern
· Enter when price breaks below the neckline
· The distance upside from the neckline. Place your target limit order there.
· The Head & Shoulder pattern is not complete and the downtrend is not reversed until neckline resistance is broken.