Head and Shoulders Pattern
Definition of 'Head and Shoulders Pattern'
The head and shoulders pattern is often interpreted as a sign that the uptrend in the security is coming to an end and that a reversal to the downside is likely. This is because the pattern is said to resemble a human head and shoulders, with the head representing the peak of the uptrend, the shoulders representing the two lower peaks, and the neckline representing the neck.
The head and shoulders pattern can be either a right- or left-shouldered pattern. In a right-shouldered pattern, the right shoulder is lower than the left shoulder. In a left-shouldered pattern, the left shoulder is lower than the right shoulder.
The head and shoulders pattern is considered to be a more reliable indicator when it is confirmed by other technical indicators, such as a decline in volume or a break below the neckline.
Here are some additional things to keep in mind about the head and shoulders pattern:
* The pattern is more likely to be valid if it occurs after a strong uptrend.
* The pattern is more likely to be valid if the neckline is sloping down.
* The pattern is more likely to be valid if the price breaks below the neckline with a strong bearish candle.
* The pattern is more likely to be valid if the price continues to decline after breaking below the neckline.
The head and shoulders pattern is a useful technical analysis tool that can help traders identify potential reversals in the price of a security. However, it is important to remember that no technical indicator is perfect and that other factors should always be considered before making a trading decision.
Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.
Is this definition wrong? Let us know by posting to the forum and we will correct it.