Reversal Chart Patterns: Head & Shoulders & Reverse Head Shoulders

Head & shoulders Pattern

This is a reversal trading pattern which forms after an extended Stock Indices upwards trend. It is made up of three consecutive peaks, the left shoulder, the head and the right shoulder with two moderate troughs between the shoulders.

This pattern setup is considered complete once price penetrates and moves below the neckline, which is plotted by joining the 2 troughs between the shoulders pattern setup.

To go short, Stock traders place their sell stop stock trade orders just below the neck line.

Summary:

• This Stock Indices pattern forms after an extended move upward
• This formation indicates that there will be a reversal in market
• This formation resembles head with shoulders thus its name.
• To draw the neck-line we use chart point 1 and point 2 as shown below. We also extend this line in both directions.
• We sell when price breaks out below neck line point: see the chart below for explanation.

Or the head & shoulders can also form on a slanting neckline, like the example illustrated below:

Examples of Head & Shoulders Pattern on a Stock Chart

Head & Shoulders Pattern

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

Reverse Head & Shoulders Pattern

This is a reversal head and shoulders pattern which forms after an extended Stock Indices downward trend. It resembles an up-side down head shoulders.

This pattern setup is considered complete once price penetrates above neckline, which is plotted by joining these 2 peaks between the reverse shoulders pattern setup.

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

Summary:

• This Stock Indices pattern forms after an extended move downward
• This formation indicates that there will be a reversal in market
• This formation resembles upside down, thus the name Reverse.
• We buy when price breaks-out above neck line point: see the chart below for explanation.

Example of Reverse Head & Shoulders Pattern on a Stock Chart

Example of Reverse Head & Shoulders Pattern