Head and Shoulders Top Pattern
Head and shoulders top is a very popular chart pattern indicating bearish trend reversal. It is a long-term chart pattern and is considered among the most reliable chart patterns. The formation, with three peaks, resembles the head and shoulders of a man, and hence the name.
There are strict rules for identifying a head and shoulders pattern. The requirements include,
Head and shoulders pattern is considered as a good shorting opportunity as the price tends to decline fast because there is no support available once it breaks the neckline.
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There are strict rules for identifying a head and shoulders pattern. The requirements include,
- A typical pattern formation takes 2 to 4 months to complete.
- The pattern must have three parts - a left shoulder, a head and a right shoulder.
- The left shoulder is formed by a price peak and then a decline.
- The head is also a peak and a decline but rises higher than left shoulder.
- The right shoulder is a peak and decline which does not rise as much as the head.
- A horizontal/diagonal neck line is also drawn connecting the lows of shoulders, which serves as support.
- The volume should be high at left shoulder but declines as the pattern forms. The sell-offs (declines) are noticeable with increase in volume.
Head and shoulders pattern is considered as a good shorting opportunity as the price tends to decline fast because there is no support available once it breaks the neckline.
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posted by NobleTrading at
12:17 PM
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