Reversal Chart Patterns: Head & Shoulders and Inverse Head & Shoulders

Head & shoulders Pattern

This is a reversal chart pattern which forms after an extended upwards trend. It is made up of 3 consecutive peaks, the left shoulder, head and the right shoulder with 2 moderate troughs in between the shoulders.

This pattern formation is considered complete once price penetrates and moves below the neckline, which's drawn by joining the 2 troughs in between the shoulders setup.

To go short, traders place their sell stop orders just below neck line.

Summary:

• This XAU USD setup forms after an extended move upwards
• This formation shows that there'll be a reversal in market
• This formation resembles a head with shoulders thus its title.
• To draw the neck-line we use chart point 1 and point 2 such as illustrated & shown below. We also extend the line in both directions.
• We sell when the price breaks-out below neck line point: see the chart below for explanation.

Or the head & shoulders also can form on a sloping neck-line, such as the example shown below:

Example of Head & Shoulders Setup on a Chart

Head and Shoulders Chart Pattern

This pattern can also be formed on a sloping neckline, like the one above, the neck-line doesn't have to be necessarily horizontal.

Reverse Head & Shoulders Pattern

This is a reversal head & shoulders pattern which forms after an extended XAUUSD downward trend. It looks like an upside down head shoulders.

This pattern setup formation is considered complete once price penetrates above neck-line, which's drawn by joining these 2 peaks in between the reverse shoulders setup.

To go long buyers place their buy stop trade orders just above neck line.

Summary:

• This XAU USD setup forms after an extended move downwards
• This setup formation indicates that there'll be a reversal in market
• This setup formation resembles upside down, thus the name Reverse.
• We buy when price breaks out above the neckline point: see the chart below for an explanation.

Example of Inverse Head and Shoulder Chart Setup on a Trading Chart

Example of Reverse Head & Shoulders Pattern

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