Head and Shoulders Pattern: A Bearish Reversal Chart Setup
The Head and Shoulders Pattern is one of the most powerful bearish reversal patterns in technical analysis. It signals a shift from an uptrend to a downtrend and helps traders spot potential trend reversals with high accuracy.
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What is a Head and Shoulders Pattern?
This pattern appears after an uptrend and consists of three peaks:
- Left Shoulder: A price rise followed by a slight drop.
- Head: A higher peak followed by a drop again.
- Right Shoulder: A lower high, similar to the left shoulder.
The Neckline is drawn by connecting the lows after the left shoulder and head. Once the price breaks below this neckline, the pattern is confirmed.
How to Trade the Head and Shoulders Pattern
Follow these steps for a potential short (sell) trade:
- Confirmation: Wait for a breakdown below the neckline.
- Entry: Enter a sell position once the price closes below the neckline.
- Stop Loss: Place the stop loss above the right shoulder.
- Target: Measure the distance from the head to the neckline and project it down from the breakout point.
Example
Imagine a stock forms the following levels:
- Left Shoulder: ₹550
- Head: ₹600
- Right Shoulder: ₹560
- Neckline: ₹520
On breakdown below ₹520:
- Entry: ₹518
- Stop Loss: ₹565
- Target: ₹520 - (₹600 - ₹520) = ₹440
Key Characteristics
- Reliable on higher timeframes like 4H, daily, or weekly charts.
- Volume usually declines at the right shoulder and increases at breakdown.
- Confirms market exhaustion and trend reversal.
Inverse Head and Shoulders
There is also a bullish version known as the Inverse Head and Shoulders Pattern, which signals a reversal from a downtrend to an uptrend.
Conclusion
The Head and Shoulders Pattern is widely used for spotting market tops. With proper risk management and confirmation, it provides high-probability trade setups and is trusted by technical traders worldwide.
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