Head and Shoulders Chart Pattern

A Head and Shoulders chart pattern takes the following form.

Prices rise to a point and then decline. They then rise again to a higher point before declining again. For the third time they they rise but to a lower point than before before they start declining again.

The two lower peaks form the shoulders of the pattern while the highest middle peak forms the head. The head and shoulders pattern signals a trend reversal. Traders often comment that this is one of the most reliable trend-reversal patterns but this is very difficult to test through automated back-testing because of the difficulty in mathematically quantifying what a head and shoulders pattern is.

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