Knowledge
Head and Shoulders Top Pattern
The Head and Shoulders Top pattern refers to a significant price increase followed by the formation of three distinct peaks, with the middle peak slightly higher than the two side peaks. The three peaks are referred to as the left shoulder, head, and right shoulder from left to right.
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 two side peaks are generally at the same horizontal level, and the middle peak is significantly higher than the side peaks.
2. The low points from the first two pullbacks are generally the same, and the last pullback breaks below the line connecting the previous two low points and closes beneath 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 blocked near the neckline, confirming the effectiveness of the downward breakout.
5. In actual price movements, it is possible to have two left shoulders or two right shoulders, which belong to a variant form of the Head and Shoulders Top.
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 drops back from the third peak and breaks below the neckline, indicating that the Head and Shoulders Top pattern has formed. One should promptly take profits or cut losses to preserve their profits.
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. Do not be overly optimistic, thinking the price will continue to rise, as this may easily lead to greater losses.