After discussing about patterns in my
previous post, I deemed to go a bit further down the topic by
discussing one of the most famous and widely popular pattern – Head
and Shoulders.
Head and Shoulders according to my
research is one of the most famous reversal pattern. Reversal means
that there is a change in the direction of the trend. It is meant to
go to the opposite direction of the trend. Head and Shoulders is
found on both the bullish and bearish trend but is named differently
depending on the current pattern. If in case the trend is bullish, it
is called Head and Shoulders Top. On the other hand, if it is in the
bearish trend, it is called Head and Shoulders Bottom.
The pattern is composed of three parts:
left shoulder, head, right shoulder. A horizontal line is drawn to
serve as the neckline for the pattern which makes it similar to a
head and shoulders of an alligator.
How it is formed?
The
left shoulder is normally formed after a long movement in the market.
After its formation, price usually goes to the opposite side until it
reaches a value which will reverse it. At this point, the
head will be formed as the price rises until it reaches a peak higher
than the value of the left shoulder. It will again start to descend
until its reversal which will draw the right shoulder. The highest
value of the two shoulders are usually the same or almost the same.
The neckline will be drawn by putting a horizontal line between the
beginning and ending price of the head.
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