Head and shoulders chart pattern

The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

The head and shoulders pattern is a popular chart pattern used by technical analysts to predict future price movements of an asset. It is formed by three peaks, with the center peak being the highest (the "head") and the two other peaks being slightly lower (the "shoulders").

To recognize a head and shoulders pattern, an investor should look for three distinct peaks on a price chart. The first peak is formed when the asset reaches a high point, followed by a downturn that forms the first low point, or the "left shoulder." The price then rises again to form the highest peak, or the "head," before falling once more to form the second low point, or the "right shoulder." The neckline is then drawn by connecting the low points of the left shoulder and right shoulder.

Once the pattern is identified, traders use the neckline as a key level of support or resistance. If the price breaks below the neckline, it is considered a bearish signal, indicating that the asset is likely to continue falling. On the other hand, if the price breaks above the neckline, it is seen as a bullish signal, suggesting that the asset will continue to rise.

Investors can also use the height of the head and shoulders pattern to predict future price movements. By measuring the distance from the head to the neckline and projecting it below the neckline, traders can estimate a potential price target for the asset.

It is important to note that the head and shoulders pattern is not always accurate, and traders should use it in conjunction with other technical analysis tools to confirm their trading decisions.