what is a head and shoulders chart pattern

What is a head and shoulders chart pattern ?

Technical analysis makes use of a head and shoulders pattern. A bullish-to-bearish trend reversal is predicted by this particular chart formation. Three peaks make up the pattern, with the middle peak being the highest and the outer two being near in height.

When the price of a stock peaks and then falls back to the bottom of the previous upswing, the head and shoulders pattern is created. The price then forms the "head" by rising above the prior high before falling back to the base. The stock price then declines after reaching a new peak around the level of the formation's original peak.

One of the most dependable trend reversal patterns is the head and shoulders pattern. It is one of numerous top patterns that indicate the conclusion of an upward trend, with differing degrees of accuracy.

what is a head and shoulders chart pattern

KEYTAKEAWAYS

• A technical indication known as a "head and shoulders pattern" has three peaks on its chart, with the middle peak being the tallest and the outside two being close together in height.
• A head and shoulders pattern is a chart formation that forecasts a bullish-to-bearish trend reversal and is regarded as one of the most accurate trend reversal patterns.
• A bearish-to-bullish trend is predicted by an inverse head and shoulders pattern.
• 
  
• Depending on the direction of the design, the neckline sits at either the resistance or support lines. 

Knowing the Pattern of the Head and Shoulders:-

There are four parts to a head and shoulders pattern:

1. The price climbs to a high and then falls to form a trough following extended bullish patterns.
2. After rising once more to create a second high that is significantly higher than the first peak, the price drops once more.
3. Only to the first high level does the price rise a third time before falling once more.
4. The inverse neckline is depicted at the two peaks or troughs. 
5. The head is formed by the second peak, while the shoulders are formed by the first and third peaks. The neckline is the line that joins the first and second troughs.

What Does the Head and Shoulders Pattern Tell You?

A reversal is possible, according to the head and shoulders pattern.
Three sets of peaks and troughs, with a greater peak in the centre, are thought by traders to indicate that a stock's price is about to start declining. The neckline is a representation of when bearish traders begin to sell. Additionally, the pattern suggests that the new downward trend will probably persist until the right shoulder—where prices rise above the right peak—is broken.

what is a head and shoulders chart pattern

Advantages and Disadvantages of the Head and Shoulders Pattern

Advantagaes:-

• Skilled merchants can quickly spot it.
• Clearly defined risk and profit
• It is possible to profit from significant market movements.
• Suitable for all markets

Disadvantage:-

• Novice traders might overlook it.
• Potentially long stop loss lengths
• Potentially unfavourable risk-to-reward 

Advantage explained :-

• Experienced traders identify it easily: An expert trader can easily recognise the pattern.
• Defined profit and risk: Confirmation openings and closings provide for the unambiguous definition of short and long entry levels as well as stop distance.
• Big market movements can be profited from:The timeframe for a head and shoulders pattern is fairly long, so a market can move significantly from entry to close price.
• Can be used in all markets:The pattern is applicable to both stock and FX trading.
  

Disadvantage explained:-

• Novice traders might miss it: New traders may be confused by the skewed head and shoulders pattern, which may not come with a flat neckline.
• Large stop loss distances possible: Large downward movement over long timeframes can result in a large stop distance.
• Neckline can appear to move: Some traders may become confused if the neckline is retested if the price declines.

What Does a Head and Shoulders Pattern Tell You ?

According to some, the head and shoulders chart indicates that an upward trend is about to finish and shows a bullish-to-bearish trend reversal. It is regarded by investors as one of the most trustworthy trend reversal patterns.

How Reliable Is a Head and Shoulders Pattern ?

A neckline breakout with a stop above (market peak) or below (market bottom) the right shoulder is the most typical entry position. When the pattern is added (market bottom) or subtracted (market top) from the breakout price, the profit goal is the difference between the high and low. Despite its flaws, the approach offers a way to trade the markets using rational price fluctuations.

Can Head and Shoulders Turn Bullish ?

The head and shoulders top is used to forecast reversals in downtrends, whereas the inverse head and shoulders, often known as a "head and shoulders bottom," is comparable to the conventional head and shoulders pattern but inverted. This indicator ranges from bearish to bullish.

What Is the Opposite of a Head and Shoulders Pattern ?

A reversal from a negative trend to a bullish trend is indicated by the inverse head and shoulders pattern, which is the reverse of the head and shoulders pattern.

The Bottom Line

Traders utilise the head and shoulders pattern to spot price reversals. Three peaks make up a bearish head and shoulders, with the central peak rising higher than the other two. It signals that an upward trend is reversing.
There are three troughs in a bullish head and shoulders pattern, with the middle one being lower than the other two. It signals that a downward trend is about to reverse.

• Types of chart patterns
  

• Head and shoulders
• Cup and handle
• Descending triangle
• Double top
• Ascending triangle

That all for this blog click here types of chart pattern.