One of the most often used and consistent chart patterns in technical analysis is the Head and Shoulders one. Whether or not you trade, knowing this pattern will enable you to make wise trading decisions and forecast when the market will turn direction.

This blog will lead you through the stages, explain the Head and Shoulders pattern in its whole, investigate its applicability, and provide doable trading advice.

What is the Head and Shoulders Pattern?

One reversal pattern that can point to a trend shift is the Head and Shoulders pattern. Often seen around the bottom of an upward trend, it indicates that the optimistic drive is vanishing. The pattern consists of three peaks:

·       Left Shoulder (Initial Peak and Decline): The price climbs to a peak before dropping to create the pattern's left shoulder. This drop suggests that the previously observed increasing trend has been temporarily reversed.

·       Head (Higher Peak and Another Decline): When the left shoulder is completed, the price rises again, forming a higher peak known as the head. This peak indicates that there is a steep ascent ahead. After the head is produced, the price falls again.

·       Right Shoulder (Third Peak): Following the decline from the head, the price forms a third high that resembles the prior peak. The right shoulder is now fully formed and an exact copy of the left shoulder.

·       Neckline: Finally, the neckline—a horizontal line connecting the troughs of the first and second shoulders—is the most important part of the head and shoulders chart pattern. If the price falls below this neckline, the reversal is verified and the pattern is regarded complete.