The name of this formation is given after its shape. This formation looks like a head and shoulders. It consists of three consecutive rallies all based in the same support line named neckline. The two shoulders should be almost equal on height and head should be the highest. You may enter the market during retest of broken neckline. The most significant head and shoulders pattern is in weekly or monthly or daily charts. Head and shoulders on lower time frame are unreliable. Price target is the length between top of head and neckline.

A head and shoulders pattern in a daily chart.

In real market environment head and shoulders almost never appears as clean as the schematic. Trader must be careful not to misinterpret false head and a shoulder keeping in mind that neckline is seldom a perfect horizontal line although the significant point of the formation should be tangential to the neckline. The same applies to inverse head and shoulders

Inverse head and shoulder pattern.

Look at the above market examples carefully. Then check the schematic below. Practice a lot. In order to recognize head and shoulders in market environment your eye should be flexible enough.

Schematics of head and shoulders pattern

Watch the video below to visualize head and shoulders pattern

This entry was posted on Wednesday, March 14th, 2007 at 8:28 am and is filed under Forex Trendline Analysis. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.