"Head and shoulders" - reversal price model

One of the strongest the trend reversal pattern is the figure "Head and shoulders. It can be formed either on an uptrend or on a downtrend, in which case it is called an inverted head and shoulders pattern. According to the name, this pattern has two shoulders and a head, which is higher than the shoulders.

The formation of the figure "Head and Shoulders"

In the picture we see how the price, having reached its top, after overcoming the resistance (in stock exchange slang "neckline"), rolls back to this level, which has become support, forming the first, left shoulder. Then the price turns around and renews the highs, after which it rolls back to support again. Then the last attempt of growth takes place, but it is a failure - the price maximum is not renewed, which provokes the bears to act and they start to sell actively, forming the right shoulder. The price breaks the neckline downwards with a possible test of this line from the other side, and if it cannot be broken from the bottom upwards, the price starts to fall rapidly.

"Head and shoulders" in practical trading

Target Declines are determined by the distance from the line of the neck to the maximum of the figure. Stop It is safest to place it over the top of the right shoulder.

Inverted Head and Shoulders Figure is formed by the change of downtrend to the ascending one. The rules described above work in a mirror manner.