This blog post is not meant to be technical, but a simplified explanation of the pattern, nor will it teach you how to trade.
The head and shoulders chart pattern is highly used by traders to buy and sell.
The pattern consists of a left should, a head, and a right shoulder, naturally forming a right armpit and a left armpit.
1. The market starts off in an uptrend, peaks and dips forming the right shoulder and armpit.
2. Rises again to a higher high reaching the head and dips again forming the left armpit.
3. Rises for the second time forming the right shoulder and down again.
Once the head and shoulders are formed a neckline is created from connecting the right armpit to the left armpit, which pretty much serves as a support line, also known as confirmation line.
Once prices dip below the neck line, a signal is given to sell which is called BREAKOUT.
After the breakout the market rises again but only to reach the neckline which now becomes a resistance line and the market goes downwards or officially bearish.
The average maximum decline after a breakout before the invalidation of the pattern is a decline of 22 percent.
The head and shoulders reversal is similar to a double bottom chart pattern.
You might want to see this blog post: Morning Star, Hammer, Double bottom and Other Reversals
Volume analysis it is always used along with the head and shoulders pattern, it represents the total amount of stocks, cryptos, securities (etc.) traded within a time period.
The break of the confirmation line or neckline in a HS along with a volume spike should be a confirmation to SELL. (CHECK OUT THE IMAGE)
The break of the confirmation line or neckline in a HS Reversal along with a volume spike should be a confirmation to BUY. (CHECK OUT THE IMAGE)
The chart patterns are a very important part of trading, and though they are not 100% accurate every time, they still trace a history that usually repeats itself. Using a chart pattern may maximize your trading experience.