Head and shoulders; A popular pattern in technical analysis is that when seen on the chart we should be prepared for a price fall and a terrible downtrend. In this article, you will first get acquainted with the head and shoulders pattern and the reverse (ascending) pattern and then you will learn how to trade with the help of these templates.
What is the head and shoulders pattern?
The Head and Shoulders pattern is one of the main models for technical analysis in financial markets. This pattern, which is one of the easiest patterns in terms of shape and is easily recognizable to most analysts, is based on a baseline (neckline) with three peaks (price ceiling) and the middle peak is the highest level.
The head and shoulders are a downtrend pattern in the price chart of an asset and show the change of trend from ascending to descending. When an analyst confirms such a pattern, we find that the uptrend is probably over and the market is entering a downturn. The head and shoulders pattern is a bear pattern (descending).
In addition, the same pattern can be used in reverse to change the trend from descending to ascending. In this case, the inverted head and shoulders (Inverse Head and Shoulders) or the same head and shoulders (Head and Shoulders Bottom) which is ascending, It consists of a baseline and three valleys (price floor), so that the middle valley is at the lowest level.
So the head and shoulders pattern is normally down and shows the price ceiling. If the same pattern is seen in reverse, it will be bullish and show a price floor.
The head and shoulders pattern can be found in all time frames and therefore all traders and investors can use it. This chart pattern helps the trader to identify important levels such as entry points, loss limit (emergency sell) and price targets.
Do not forget that like all patterns, there is a possibility of error in the identification of this pattern by the analyst and you can never be 100% sure of completing a head and shoulders pattern.