The head and shoulders pattern is still quite popular among traders. One is the reliability of the signal, and the other is the success rate.
Traders continue to study trends and patterns, and analyze the market, not just to be able to capture the possible changes in the market, and then make a profit from it? Therefore, identifying patterns with high reliability and digging out their characteristics are the basis for our successful trading.
What is the head and shoulders pattern?
The head-and-shoulders pattern is a signal of a market reversal. Stimulated by a large amount of trading, the price finally broke through the neckline and began to fluctuate in the opposite direction.
If the neckline is close to the level or slopes downward, the possibility of a price breakthrough is higher, and the right shoulder is usually smaller or about the same size as the left shoulder. In addition, after the price breaks through the neckline, the neckline may be tested again.
The head-and-shoulders pattern may appear in any periodic timetable, not limited to the minute chart, hour chart, weekly chart, monthly chart, etc. However, as a whole, the longer the time period, the higher the probability of a successful transaction.
One more thing to remember is that no pattern can be perfectly presented in the market. The price in the head and shoulders pattern may be a little different from the book display, because the market price is always changing from time to time.
What is the inverted head and shoulders pattern?
The inverted head and shoulders form is like the other side of the mirror, the opposite of the original form.
Interpretation of the pattern: determine the target and stop loss
The reason why the trading head and shoulders pattern is favored by many traders is also because it is easy to set profit targets. Usually enter the market after the price breaks through the neckline, and the minimum profit target is equivalent to the straight-line distance from the head to the neckline in the pattern.
Stop loss can optionally be set at the height of the right shoulder. If it is an inverted head and shoulders pattern, then the stop loss is set at the lower right shoulder.
Examples of head and shoulders patterns:
In the daily chart above, the price breaks through the neckline downwards, and the price drops rapidly, and a candle chart can reach the profit target.
Examples of the inverted head and shoulders pattern:
The above hourly chart is an inverted head and shoulders pattern. Although it did not reach the target with a candle like the above, it still reached the target price soon after the price broke the neckline.
Note that there is no retest of the price here, and the neckline also appears to be curved to a certain degree, not completely straight.
In order to achieve the profit target, there must be compliance principles and reasonable risk management when trading. The head and shoulders pattern is liked and applied by many traders because of its advantageous risk-reward ratio.
However, no pattern is 100% accurate. Under market volatility, any pattern will have certain variables. When trading, you must learn to take advantage of the situation.