A Must-Read for Retail Investors: The Head and Shoulders Top Pattern!
The Head and Shoulders Top refers to a price pattern that forms after a significant price increase, characterized by three distinct peaks, with the middle peak slightly higher than the two on either side. The three peaks are referred to from left to right as the left shoulder, the head, and the right shoulder.
The characteristics of the Head and Shoulders Top are as follows:
1. It appears during an upward trend, with three peaks where the tops of the left and right peaks are generally at the same horizontal level, while the top of the middle peak is significantly higher than the tops of the side peaks.
2. The low points after the first two peaks are essentially the same, and the last peak breaks below the line connecting the previous two low points and closes below it.
3. During the formation of the Head and Shoulders Top, the trading volume decreases sequentially.
4. After breaking the neckline, there is often a pullback action, where it is resisted and falls back near the neckline, confirming that the downward breakout is valid.
5. In actual price movements, it is possible to see two left shoulders or two right shoulders, which belong to a variant of the Head and Shoulders Top pattern.
When investors encounter the Head and Shoulders Top pattern, how can they find the best selling point?
1. The first selling point is when the price falls back from the third peak and breaks below the neckline, indicating that the Head and Shoulders Top pattern has formed. Investors should promptly take profits and stop losses to preserve their profits.
2. If the first selling point is missed, the price may experience a significant decline in the short term. In this case, do not rush to cut losses; generally, the Head and Shoulders Top pattern will exhibit a pullback to the neckline. When the price pulls back to the neckline, seize the last opportunity, and do not hold on to false hopes that the price will continue to rise; otherwise, it could easily lead to larger losses.
