Head and Shoulders Pattern : Highly Dependable Patterns in Technical Analysis!
The head and shoulders pattern is a reversal pattern, when this pattern is formed this shows that the price will move against the previous trend.
There are 2 types of chart patterns that occur, the first top head and shoulder which is a technical signal that shows the price is ready to go down. When the pattern is complete and confirmed, it will often form the highest price of an uptrend.
The next pattern is the bottom head and shoulder indicating the price is ready to move up and this will usually form when a downward trend occurs.
The 2 types of patterns we mentioned above have almost the same shape, in which there are 4 main parts. This section is 2 pieces (shoulder), 1 head (head), and 1 confirmation line (neckline).
The head and shoulders pattern is a collection of peaks and troughs. Peaks are conditions when prices reach a peak and have a tendency to correct. Troughs are conditions when prices are in transition and ready to go back up.
Understanding the Formation of a Head and Shoulder Pattern
The head and shoulder pattern is a reversal pattern, when an uptrend occurs, the price is likely to move down. Conversely, when the trend is down, prices will have a tendency to move up.
Overall there are 4 steps in the pattern formation process.
Top Head and Shoulders
First is the left shoulder that will be formed when the price has reached the new high price and experiences a correction to the new lowest price.
In the second step there is the formation of head formation, this happens when the price has penetrated the previous highest price. Then again experienced a correction close to the lowest price formed on the left shoulder.
Then the third step was started, namely right shoulder formation, formed when prices began to move up again, but could not be higher than the highest price in the head. Then followed by a decline in the price towards the lowest price on the left shoulder.
The pattern is considered complete when the price is able to cross the neckline which is the support line created when the formation of the left lowest shoulder price and head.
The process of forming a bottom head and shoulder is almost the same as the process above, but with a reverse formation.
The first step begins with left shoulder formation, this process occurs when prices fall to a new low and begin to rebound to higher prices.
Next go to the second step, where head formation begins when the price succeeds in forming the new lowest price and will then be followed by a rebound that approaches the highest price level on the left shoulder.
In the third step, the formation of the right shoulder formation begins, currently there is a sell-off which pushes prices to move down. In this condition the price failed to break the lowest price on the head and then followed by the return of the price to the neckline.
The pattern above will be complete and confirmed when the price can move past the neckline.
If using technical analysis, the volume will play an important role as a secondary indicator. The volume will show movement activity, where when high volume means there are many transaction activities.
If talking about the head and shoulders pattern, the most important volume is used when the neckline is broken. At this point the break of the neckline line followed by the movement of large volumes is important to note.
Large volume when it successfully breaks the neckline on the top head and shoulder which indicates there is a large sell-off. The opposite is also true of the bottom head and shoulder, where large volumes during the neckline break indicate that there is a very large buying activity.
Pay attention to the Neckline Line
Another factor you need to pay attention to when using the head and shoulders pattern is the shape of the neckline line. Neckline lines have functions as support and resistance during head and shoulder pattern formation. Not only that, the neckline line is also the entry point when the pattern is confirmed.
Another thing you need to pay attention to is the shape of the neckline line is not always flat or flat, because the shape of the line can be tilted. There are a number of events that indicate a neckline line that is slightly tilted up or down. However, when viewed in general the neckline line is usually flatter and slightly upward.While for the bottom head and shoulder can be directed down.
Price Target at Head and Shoulders
The next important factor that is very important to note in technical analysis is the calculation of price targets. The price target has the benefit of estimating the purpose of the next price movement by using a confirmed pattern.
When you are going to do this, you need to assume price movements based on the available confirmation indication. This is done so that the target can be determined either in favorable conditions or at a loss.
Price targets can be measured based on the height of the head and shoulder pattern, the distance between the top of the head and the neckline line. For example like this the highest price in the head is at 1000 and the neckline line is at 900, in this case there is a difference of 100.
The way to calculate the target price is to reduce 900 by the difference between the highest price and the neckline line. Using the example above, the target price is 800. How to estimate the price target we submit is not valid, but you can use it to target the price target.
Such is the complete discussion about the head and shoulder patterns that you need to understand well as a forex trader. The head and shoulder pattern has benefits when you use it in technical analysis.
Hopefully the information we convey above provides many benefits for you all. If you have questions related to the topic of the head and shoulder pattern, you can ask us through the comments column below. We will gladly answer every question that comes in.