Head and Shoulder

Head and Shoulder is one of the very common and profitable chart patterns. It is very reliable with 95% probability. Its similarity to to head and shoulder of a man gives it its name. It can be a bullish pattern or a bearish pattern.

In an up trend stock prices keeps moving up making new higher high. At the end of an up move, when the buyers to sellers ratio reverses, the price collapses and falls near to the previous swing low.

The pull back causes more people to buy the stock, but with less crowd. So the prices makes a swing up. The trend line joining these two swing bottoms and is called 'neck line'. When extended it offers good support and resistance.

This time the price does not go up to the previous swing up, that is it does not make a higher high. Some where at the half of it, the sellers out number the buyers and the price starts falling. It breaks the neckline and falls below that. This is a sell signal. Here cover long position and go short.

The price difference from high of the head to the neckline is the target for the trade from the breakout point. The stop loss will be above the right or second shoulder.

In a bear market, a reverse pattern gives a buy signal.

See how the neckline which was a resistance earlier becomes support later.

The following charts are same as above charts continued in time.

Here the risk to reward ratio is 1:4.

| Privacy Policy | Disclaimer |