Why do retail investors often incur losses? What does the head and shoulders top pattern mean? Do you still understand?
The head and shoulders top refers to a price action where, after a significant price increase, the chart shows three distinct peaks, with the middle peak slightly higher than the two on the sides. The three peaks are referred to from left to right as the left shoulder, head, and right shoulder.
The characteristics of the head and shoulders top are as follows:
1. It appears during an uptrend, with three peaks where the tops of the left and right peaks are generally at the same horizontal level, while the middle peak is significantly higher than the side peaks.
2. The low points after the first two peaks are basically the same, and the last peak's decline 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 below the neckline, there is often a pullback action, which gets resisted near the neckline and falls back, confirming the downward breakout is valid.
5. In actual price movements, there could be two left shoulders or two right shoulders, which are considered variations 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. One should timely take profit and stop loss to protect their gains.
2. If the first selling point is missed, the price may experience a significant drop in the short term. In this case, do not rush to cut losses. Generally, the head and shoulders top pattern will show a pullback to the neckline. When the price pulls back to the neckline, seize the last opportunity and do not harbor false hopes that the price will continue to rise; otherwise, it could lead to even greater losses.