Head Shoulders Pattern

Head and shoulders is a technical chart pattern widely used by investors and traders for identifying market trends. It is a formation which usually occurs when the stock or index is in the process of reversing from an ongoing price trend. It is formed by a peak, known as ‘shoulder’ followed by a higher peak, known as ‘head’ and then another lower peak, second ‘shoulder’. A line drawn to connect the lowest points of the two troughs is known as the ‘neckline’. The line can slope upwards or downwards. A downward slope is considered as a more reliable signal.

How to identify the ‘head and shoulders’ price pattern?

This pattern is generally formed on the chart when the stock or index reaches its peak and declines from there. The price then rises above the previous peak and declines again. It rises from that point again, but not as high as the second peak and declines from that point. The middle peak forms the ‘head’ kind of structure and the peaks on two sides create its ‘shoulders’ to form the Head and shoulders pattern.

How to interpret and use the Head and shoulders price pattern?

The head and shoulders pattern should be used alongwith other technical indicators and momentum oscillators like the RSI, volumes and moving average. It is viewed largely as a short-term trading strategy.