The head and shoulders pattern is a technical analysis pattern used in financial markets to predict the reversal of a current trend. It is a bearish pattern that typically forms after an uptrend and signals a potential trend reversal to the downside. The pattern is named for its visual resemblance to a head and shoulders and consists of three peaks:
Left Shoulder: The first peak occurs at the end of an uptrend, representing a high point in the price.
Head: Following the left shoulder, there is a higher peak, known as the head, which is the highest point in the pattern. The head is formed as the price makes a final upward push.
Right Shoulder: After the head, there is a third peak, similar in height to the left shoulder. This peak is followed by a decline in prices, forming a neckline.
The pattern is completed when the price breaks below the neckline, which connects the lows of the left and right shoulders. The neckline acts as a support level, and the break below it suggests a shift in sentiment from bullish to bearish.
The head and shoulders pattern is considered a reversal pattern because it indicates a change in the trend. Traders often use the pattern to make informed decisions about selling existing positions or entering short trades.
It's important to note that not all head and shoulders patterns result in a reversal, and traders should use additional technical indicators and analysis to confirm the validity of the pattern. Additionally, false signals can occur, so risk management strategies are crucial when incorporating any technical analysis pattern into trading decisions.
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