Head and Shoulders
Head and shoulders is a pattern that describes the end of an existing trend and the remote change in the future of the price movement. This indicates that the trend is over and the direction of the asset price changes. Such a situation may occur when a developed trend, going upwards.
Head and Shoulders in Trading
This pattern is represented by three maximum points of market prices, which are placed at different levels: The bottom two points (shoulders) at one side and the highest point (head) between them. It may also form the neckline (support), which connects the minimum values of the pattern.
Once the pattern is formed, and the cost is lowered below the neckline or the support level (subject to individual tolerance), the trader receives a signal to sell. It is predicted that the price decline will continue, although prices will bounce to the neckline that can be considered as resistance; it will generally stop around.
It is assumed that after the head and shoulders pattern is formed, the price usually drops at least to the level calculated as follows:
T = N – (H – N)
T – Target Level
N – Neckline Level (Initial Support)
H – Level Model of the Head (Highest Peak)