How to Trade Securities Using the Head and Shoulders Top Pattern
When it comes to technical analysis, the Head and Shoulders Top is a classic pattern. It is arguably one of the most popular and reliable patterns, period. The reason for its popularity has to do with the fact that new and veteran investors alike can easily recognize it. Is it reliable? You bet. This pattern rarely produces false positives.
What a Head And Shoulders Top Looks Like Quite simply, the Head and Should Top pattern resembles a human. The head (the highest peak) has two shoulders on each side (smaller peaks). The patterns is formed when a rally experiences a pull-back, followed by another rally that reaches a higher high than the last, and then a third rally (the right shoulder) that reaches the same left as the first (left shoulder).
Technical analysis will take this one step farther by stipulating volume requirements. Essentially, the first peak (left shoulder) will see the heaviest volume as the stock increases. The head and right shoulder will show diminished volume.
More Technical Considerations Aside from the easily identified pattern that a head and shoulders top creates after the three rallies and the volume requirement listed above, investors should note that the left and right shoulders will peak at roughly the same price levels. As well, the investor can draw neckline between to the two pullbacks and this can slope upwards or downwards. If that neckline is upward-sloping, then the pattern is considered more bullish than a flat or downward sloping neckline. For a solid bearish trade, confirm a downward sloping neckline.
Investors also need to consider the moving average (MA). The Head and Shoulders Top should occur above an appropriate MA, which is often the 50-day moving average but can also be the 200-day MA for longer patterns. As well, the MA should be trending in the same direction as the head and shoulders pattern. In the event that it does not, then it simply suggests that the head and shoulders top is less reliable.
Head and Shoulders-based Trading When making trades based on the head and shoulders pattern, investors should realize that the longer it takes for the pattern to unfold, the longer it will take for the price to drop down to its target. Likewise, in order to confirm this pattern, traders should consider the inbound trend. The inbound trend should last longer than the pattern's overall trend, otherwise it is quite likely that the pattern itself is simply indicating a period of consolidation and is not a true, bearish signal.
Hundreds of head and shoulders patterns will take shape every day. The question is not normally whether the pattern exists but whether it is strong, reliable, and legitimate enough to make a trade decision. Since a fair degree of technical analysis knowledge is required, investors who prefer low-involvement relationships with their investing are often recommended to start with trading software and systems. - 23218
What a Head And Shoulders Top Looks Like Quite simply, the Head and Should Top pattern resembles a human. The head (the highest peak) has two shoulders on each side (smaller peaks). The patterns is formed when a rally experiences a pull-back, followed by another rally that reaches a higher high than the last, and then a third rally (the right shoulder) that reaches the same left as the first (left shoulder).
Technical analysis will take this one step farther by stipulating volume requirements. Essentially, the first peak (left shoulder) will see the heaviest volume as the stock increases. The head and right shoulder will show diminished volume.
More Technical Considerations Aside from the easily identified pattern that a head and shoulders top creates after the three rallies and the volume requirement listed above, investors should note that the left and right shoulders will peak at roughly the same price levels. As well, the investor can draw neckline between to the two pullbacks and this can slope upwards or downwards. If that neckline is upward-sloping, then the pattern is considered more bullish than a flat or downward sloping neckline. For a solid bearish trade, confirm a downward sloping neckline.
Investors also need to consider the moving average (MA). The Head and Shoulders Top should occur above an appropriate MA, which is often the 50-day moving average but can also be the 200-day MA for longer patterns. As well, the MA should be trending in the same direction as the head and shoulders pattern. In the event that it does not, then it simply suggests that the head and shoulders top is less reliable.
Head and Shoulders-based Trading When making trades based on the head and shoulders pattern, investors should realize that the longer it takes for the pattern to unfold, the longer it will take for the price to drop down to its target. Likewise, in order to confirm this pattern, traders should consider the inbound trend. The inbound trend should last longer than the pattern's overall trend, otherwise it is quite likely that the pattern itself is simply indicating a period of consolidation and is not a true, bearish signal.
Hundreds of head and shoulders patterns will take shape every day. The question is not normally whether the pattern exists but whether it is strong, reliable, and legitimate enough to make a trade decision. Since a fair degree of technical analysis knowledge is required, investors who prefer low-involvement relationships with their investing are often recommended to start with trading software and systems. - 23218
About the Author:
With more than 16 years of experience as a Financial Advisor for one of the world's largest commercial banks, Chris Blanchet is responsible for the Free Technical Analysis Course at Online Trader Today.com. He also maintains a Debt-Free Blog at How To Repay Debt.com.
posted by X - Men @ 3:33 AM
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