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Head and shoulders pattern in technical analysis

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Head and shoulders pattern in technical analysis

Do you know the effect of the bulls and bears battle on the stock value?!!

Are you familiar with the head and shoulder pattern and its application in trading analysis and forecasting stock value?


What is the head and shoulders pattern?


The head and shoulders pattern is a chart shape that resembles a line with three peaks, the outer two parts are close to each other in height and the middle peak is higher. In technical analysis, the head and shoulders pattern describes a specific chart that It predicts an upward to downward trend. This is one of several top patterns that signal with varying degrees of accuracy that an uptrend is nearing its end.


Understanding the head and shoulders pattern


A head and shoulders pattern is formed when the stock price rises to a peak and subsequently declines to the base of the previous move. Then, the price rises to reach a “nose” above the previous peak and falls back to the original base. Eventually, the stock price will rise again, but will once again reach the initial high before falling back to the base or neckline of the chart patterns.


What does the head and shoulders pattern tell you?


The head and shoulders pattern consists of three parts:

After a long uptrend, the price reaches a peak and subsequently declines.

The price rises again to form a second peak that is significantly higher than the previous peak and then declines again.

The price rises a third time, but only reaches the level of the first peak, and then falls again.

The line connecting the first and third heads is called the necklace.

An inverted or inverted head and shoulders pattern is also a reliable indicator that can indicate that a downtrend is turning into an uptrend. In this case, the stock price reaches three consecutive valleys, which are separated by a temporary price increase. Of these, the second trough has the lowest price level (head) and the first and third are shallower (shoulders). The final trend after the third drop indicates that the bearish trend has reversed and prices are likely to rise.


Tug of war


Stock prices are the result of a constant game of tug-of-war. Whether the stock price goes up or down is directly related to the number of people in each team. Those who believe that the stock price will go up are called bulls, and those who believe that the stock price will go down are called bears. If most of the stockholders are bears, the price will fall as they sell their shares to avoid losing money. If more people are buyers, the price will rise as new investors buy.


Inverted head and shoulders


The opposite point of the head and shoulders chart is the reversal head and shoulders, with the head and shoulders from above used to predict a reversal in a downtrend. This pattern is identified when the price action meets the following specifications: the price falls to a trough and then rises. The price falls below the previous level and rises again. When the final trough is made, the price moves up, towards the resistance line near the top of the previous troughs.

Head and shoulders limitations


Like all chart patterns, the ups and downs of the head and shoulders tell a very specific story about the battle between the bulls and the bears.

The initial peak and the subsequent decline indicate the downward acceleration due to the previous upward trend. By trying to maintain the uptrend as long as possible, the bulls try to push the price up from the initial peak to reach a new peak (head) level. At this point, it is still possible for the bulls to regain market dominance and continue the uptrend.

However, when the price drops a second time and reaches the valley, it is quite clear that the bears have taken over the playing field. The bulls try to raise the price again, but they succeed by raising the price to a level slightly above the valley. This failure to cross the previous highest price is a sign of bull resistance and bear dominance, and finally bears lower the price and win the game.