Shoulder - Head - Shoulder
What to do next?
The Head and Shoulders pattern is one of the most recognized figures in technical analysis. It forms when the price of an asset creates three successive highs, where the middle (the head) is higher than the sides (the shoulders).
What does it mean?
Generally, this pattern signals a possible trend change from bullish to bearish. It is as if the market is losing strength and preparing for a correction.
And then what?
Once the price breaks below an imaginary line connecting the lows between the shoulders (the neckline), the bearish signal is confirmed.
Consecutive trend:
It is most likely that after a Head and Shoulders pattern, the price will continue to decline. However, it is important to remember that no indicator is 100% accurate. Other factors such as volume, market news, and additional indicators may influence price movement.
Key points to remember:
* Reversal signal: Indicates a possible change in trend from bullish to bearish.
* Confirmation: The breakout of the neckline confirms the signal.
* It is not infallible: Other factors can influence price movement.
* Analysis tool: Useful for making investment decisions, but it should not be the only one.
Keys to Success
The head and shoulders pattern is a valuable tool in a trader's arsenal, but it requires a deep understanding to be used effectively. Here are some keys to trading with this pattern and maximizing your chances of success:
Accurate pattern identification
* The three highs: Ensure that the three highs are clearly defined and that the central high (the head) is significantly higher than the two lateral ones.
* The neckline: This line connects the lows between the left shoulder and the head, and between the head and the right shoulder. It should be clear and horizontal.
* Volume: Volume tends to decrease as the pattern forms, especially at the head.
Entry strategy
* Break of the neckline: The buy signal is generated when the price breaks below the neckline.
* Close below: It is advisable to wait for a close below the neckline to confirm the breakout and reduce the risk of false signals.
* Stop loss: Place your stop loss above the head's high to limit your losses in case the price retraces.
Price targets
* Projected measure: A common way to calculate the price target is to measure the vertical distance between the head and the neckline and project it downward from the breakout point.
* Other factors: Consider other factors such as support and resistance levels, technical indicators, and market context to adjust your price target.
Risk management
* Position size: Adjust the size of your position based on your risk tolerance and confidence in the signal.
* Diversification: Do not concentrate all your capital in a single trade. Diversify your portfolio to reduce overall risk.
Additional considerations
* False signals: The head and shoulders pattern can generate false signals, so it is important to combine it with other indicators and fundamental analysis.
* Timeframes: This pattern can appear on any timeframe, from intraday charts to monthly charts.
* Variations: There are variations of the head and shoulders pattern, such as the inverse pattern (inverse head and shoulders) that signals a possible bullish trend change.