Forex Chart Patterns|Head and Shoulders

Head&Shoulders Chart Pattern

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Head and Shoulder is a trading chart pattern that is used in technical analysis. It forms at the top of the ascending trend. Head and Shoulders is a strong signal about trend reversal. On the other hand the reverse “Head and Shoulders” forms at the bottom of descending trend signaling soon to become up trend.

This shape is considered to be a classical technical analysis pattern. It is very popular among the traders due to its reliability. However it contains a lot of elements and requires quite some time to form. At the same time it is a quite simple pattern.

On the picture you can see that the pattern consist of three consequent but not equal peaks. The highest peak is the “head”. It is located in the middle. Therefore on the left and right sides there are “shoulders”. The line between points B and C is called the neck line. In this case it is support line.
After price penetrates the level and then bounces from it twice forming the neck line (support). The third peak (right shoulder) was not as high as the top (head). It’s the first signal that bullish trend is becoming weaker.

Head and shoulders chart pattern

Price penetrates the level D and tests the neck line from below at the point F. Now the neck line acts as resistance level. The distance between D and F theoretically must be equal to the height of the “head”. Therefore it is easy to predict the target if you decide to go short. Look how support becomes resistance and vice versa, depending on which side price is.

Inverted head and shoulders

It is important to pay attention to the volume at the moment of penetration of neck line. The higher the volume the more reliable signal given by “Head and Shoulders” pattern. However with the small volume this pattern can give out false signals. The price may make a correction and continue the up trend.
It is very rarely when the ideal pattern forms by price movement. Very often you can see the neck line having slope. Also you need to take into consideration that such patterns as “Head and Shoulders” give more reliable signals on charts of higher time frames. On the time frames with period below four hours this patterns is not very reliable.

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