How to identify Head & shoulders patterns on charts and take possible trading entries??
Head & Shoulders Pattern is a Bearish Reversal chart pattern usually identified in a primary downtrend or at the end of a primary uptrend. However, there are also some different interpretations of the chat patterns that can be analyzed in sideways trend and also sometimes used as a bearish continuation pattern in some cases.
- A Head and Shoulders reversal pattern forms after an uptrend.
- The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal.
- The head and shoulders reversal pattern is made up of a left shoulder, head, right shoulder, and neckline. Other parts playing a role in the pattern are volume, the breakout, price target, and support turned resistance.
- Identification of neckline support and volume confirmation on the break can be the most critical factors.
- Stop loss will be above the high of the Right Shoulder.
- The distance from the neckline to the top of the head will be the target.
The 3 possible entries in the head & shoulders pattern are shown above in the image.
- Aggressive entry to get a better Risk Reward after the trend line breakoutโs retest
- Early entry before the neckline break
- Traditional entry after the breakout of the neckline, which also gives you the least reward among other entries but with greater confirmation.
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