Chart patterns (part 1) - Head and shoulders pattern
Technical analysis

Chart Patterns (Part 1) – Head and Shoulders Pattern

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Chart patterns or price patterns are patterns on the charts made by price movement over a period of time. These patterns are helpful in predicting the future price movement and trend direction. These patterns are a complicated version of trend lines

Basically there are two types of chart patterns:-

1. Continuation patterns – These represent a pause in the ongoing trend. This temporary interruption resumes after a period of time with the continuation of the previous trend.

2. Reversal pattern – These patterns after completion leads to change in the reversal of the previous trend.

One should always wait for confirmation of pattern to confirm whether the trend is going to reverse or continue

There are many chart patterns which exist basically on the basis on timeframes like in short term, medium-term and long term but in the following posts, I will discuss the major chart patterns we often see.

Head and shoulders pattern

It is considered to be a reversal pattern and is divided into two parts:-

1. Head and shoulders top – This pattern forms after an uptrend and after it’s completion it leads to a trend reversal. It consists of two shoulders, one head and a neckline. First or the left shoulder is the peak which leads the previous trend and the trough of this peak marks the first point of the neckline. The second peak is the highest peak which is actually the head of this pattern and the trough of this peak marks the second point of the neckline. By joining these two points of the neckline forms a support for the price. The last or the right shoulder is the peak which is almost equal to the first peak. Now the breaking point of this pattern comes when the trough of this peak breaks the neckline confirming the reversal of the trend. The breaking of the neckline is important for the confirmation of the pattern.

 

Head and shoulder top

(Chart courtesy of StockCharts.com)

Pullbacks may also occur but heavy volume with the breaking of neckline confirms the pattern.

 

Head and shoulder pullback

(Chart courtesy of StockCharts.com)

2. Head and shoulders bottom – It is also known as inverse head and shoulder. It forms after a downtrend and after its completion, it leads to a trend reversal. It also consists of two shoulders, one head and a neckline. First or the left shoulder is the trough which leads the previous trend and the peak of this trough marks the first point on the neckline. The second trough is the highest trough which is actually the head of this pattern and the peak of this trough marks the second point of the neckline. By joining these two points of the neckline forms a resistance for the price. The last or the right shoulder is the trough which is almost equal to the first trough. Now the breaking point comes when the peak of this trough breaks the neckline confirming the reversal of the trend. The breaking of the neckline is important for the confirmation of the pattern.

 

Head and shoulder bottom

(Chart courtesy of StockCharts.com)

Pullbacks may also occur but heavy volume with the breaking of neckline confirms the pattern.

 

Head and shoulder bottom pullback

(Chart courtesy of StockCharts.com)

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