Head and Shoulders & Inverse Head and Shoulders

Head and Shoulders and Inverse Head and Shoulders patterns are two of the most popular and reliable trend reversal formations.

Head and Shoulders Chart

As you can see from the chart, the Head and Shoulders pattern, or Head-and-Shoulders Top, usually forms during an uptrend. It comprises a peak (shoulder), followed by a higher peak (head) that is then followed by a lower peak (shoulder). This pattern signals that an asset's price is set to fall, since after it reaches the third peak it bounces off to pursue a downtrend.

Another characteristic of the Head and Shoulders pattern is the neckline. The neckline is a level of support or resistance and it is what connects the lowest points of the two troughs, helping traders decide at which point to place their entry orders. Traders will go short when the price reaches the neckline after it bounces off the third peak (shoulder), expecting that the price will continue to move downwards.

Inverse Head and Shoulders Chart

The Inverse Head and Shoulders is also known as the Head-and-Shoulders Bottom pattern. It is a mirror image of the Head-and-Shoulders Top and usually occurs near the end of a downtrend, indicating the reversal that is to follow.

Traders take advantage of the Inverse Head and Shoulders pattern by going long once the price breaks past the neckline.

Did you know?

Telephones and telex used for trading quotes were replaced in 1973, as Reuters introduced computer monitors.

Word of the day
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Pro Tip

Leverage is a double-edged sword. Understand it before you use it.

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