The head and shoulders top is also a trend reversal pattern. This pattern consists of a top (left shoulder), a higher top (head) that follows, and another lower top (right shoulder). The two locations formed when the price fails to rise and falls back are basically on the same horizontal line, which is the neckline we usually close. When the price fails to rise for the third time, the neckline will be broken. Thus, the head and shoulders top pattern is officially formed.
In this example, we can easily see a head and shoulders pattern.
There are three peaks on the way up, which are called the left shoulder, head and right shoulder. From the graph, the highest points of the left shoulder and the right shoulder are basically the same, while the highest point of the head is higher than the highest points of the left shoulder and the right shoulder. With the formation of the head and shoulders top pattern, we can set a stop entry order below the neckline.
We can also use the head and shoulders top pattern to set a profit target by measuring the vertical distance from the top of the head to the neckline, which is approximately equal to the distance the price may run after breaking the neckline.
As you can see in the chart, once the price breaks the neckline, the decline is at least equal to the vertical distance from the top of the head to the neckline. We know you are thinking, "The price is still going lower after hitting the pullback target." Our advice is, "Don't be greedy!".