Head and shoulder crests are also a type of trend reversal pattern.
This form consists of the top (left shoulder), the next higher top (head) and another lower top (right shoulder). The two places formed when the price failed to go up and fell down are basically on the same horizontal line. This horizontal line is what we usually call the neckline. When the price failed to rise for the third time, the neckline would be broken. As a result, the form of head and shoulders was officially announced.
In this example, we can easily see the head and shoulder top pattern.
There were 3 peaks on the way up, these 3 peaks were called left shoulder, head and right shoulder respectively. From the figure, the highest point of the left shoulder and the right shoulder are basically the same, while the highest point of the head is higher than the highest point of the left shoulder and the right shoulder.
With the formation of the head and shoulder top pattern, we can set our own stop entry order below the neckline.
We can also set profit targets through head and shoulder top patterns. The method is to measure the vertical distance from the top of the head to the neckline. This distance is approximately equal to the distance that the price may run after the neckline is broken.
As shown in the figure, you can see that once the price falls below the neckline, the drop is at least equal to the vertical distance from the top of the head to the neckline.
We know you whispered in your heart, “The price is still lower after reaching the fall target.”
Our advice is, “Don’t be greedy!”
Head and shoulders
The bottom of the head and shoulders, as the name implies, is also the shape of the head and shoulders, but this time the shape is the opposite of the head and shoulders.
In the downtrend, a trough (left shoulder) is formed first, followed by a deeper trough (head), followed by a higher trough (right shoulder).
As shown in the figure, you can see a typical head and shoulder bottom pattern. With the formation of this pattern, we can set our own stop entry order above the neckline.
The method of calculating the profit target at this time is the same as the head and shoulder top pattern. First, the vertical distance between the head and the neckline is measured. This distance is almost equal to the possible increase in price after the neckline is exceeded.
As shown in the figure, after the price broke through the neckline, there was a beautiful round of rising market.
If the price reaches your profit target, you will be happy for it. However, here we also want to tell you some other trading management skills. For example, you can lock in some profits after reaching the profit target, while continuing to hold some positions, in case the price may continue to move in the previous direction.
You will learn about this in subsequent courses.