HEAD & SHOULDERS: AMERICA'S #1 DANDRUFF SHAMPOO BRAND

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research và his Ph.D. From the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches & teaches economic sociology & the social studies of finance at the Hebrew University in Jerusalem." data-inline-tooltip="true">Adam Hayes
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What Does a Head & Shoulders Pattern Tell You?

A head & shoulders pattern is comprised of three component parts:


After long bullish trends, the price rises khổng lồ a peak & subsequently declines to form a trough.The price rises again to khung a second high substantially above the initial peak & declines again.The price rises a third time, but only to the cấp độ of the first peak, before declining once more.

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The first & third peaks are shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the neckline.


An inverse or reverse head & shoulders pattern is also a reliable indicator that can signal that a downward trend is about khổng lồ reverse into an upward trend. In this case, the stock's price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head) and the first và third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed & prices are likely to keep rallying upward.


Tug-of-War

Stock prices are the result of a continuous game of tug-of-war; whether a stock"s price goes up or down is the direct result of how many people are on each team. Those who believe a stock"s price will go up are called bulls, và those who believe the stock will go down are called bears. If more of a stock"s shareholders are bears, then its price will go down as they sell their shares khổng lồ avoid losing money. If more people are bullish, then the price will go up as new investors buy in to lớn take advantage of the opportunity.


Inverse Head và Shoulders

The opposite of a head và shoulders chart is the inverse head and shoulders, also called a head & shoulders bottom. It isinverted with the head and shoulders đứng top used lớn predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics: The price falls lớn a trough and then rises; the price falls below the former trough & then rises again; finally, the price falls again but not as far as the second trough. Once the final trough is made, the price heads upward, toward the resistance found near the top of the previous troughs.


The Market Actions Behind the Head & Shoulders Pattern

Like all charting patterns, the ups và downs of the head và shoulders pattern tell a very specific story about the battle being waged between bulls và bears.

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The initial peak and subsequent decline represent the waning momentum of the prior bullish trend. Wanting to lớn sustain the upward movement as long as possible, bulls rally to lớn push the price back up past the initial peak to lớn reach a new high (the head). At this point, it is still possible that bulls could reinstate their market dominance và continue the upward trend.


However, once the price declines a second time and reaches a point below the initial peak, it is clear that bears are gaining ground. Bulls try one more time to lớn push the price upward but succeed only in hitting the lesser high reached in the initial peak. This failure lớn surpass the highest high signals the bulls' defeat and bears take over, driving the price down & completing the reversal.


The pattern is composed of a "left shoulder," a "head," then a "right shoulder" that shows a baseline with three peaks, the middle peak being the highest. The left shoulder is marked by price declines followed by a bottom, followed by a subsequent increase. The head is formed by price declines again forming a lower bottom. The right shoulder is then created when the price increases once again, then declines to form the right bottom.


The head & shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it khổng lồ be one of the most reliable trend reversal patterns.


The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference between the high và low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but it does provide a method of trading the markets based on logical price movements.


An inverse head and shoulders, also called a "head & shoulders bottom," is similar to lớn the standard head và shoulders pattern, but inverted, with the head & shoulders đứng top used lớn predict reversals in downtrends.