Head and Shoulders Pattern

Head and Shoulders Pattern

Head and Shoulders Pattern

Everybody knows that it’s impossible to be completely sure when and in which direction the market will move. Although their environment can often seem chaotic, traders often use patterns to guess which direction prices will take. There are numerous patterns that can be used to make this prediction, and one of the most important ones is the so called head and shoulders pattern. It’s a technical analysis term used to describe a chart formation in which a stock’s price firstly rises to a peak and then declines. We will show you exactly what we mean in the rest of this article where our experts will explain how this particular pattern type can be used in binary options trading. Don’t go away!

Head and Shoulders Pattern | What does it look like?

The head and shoulders pattern can be seen when the market reaches its top. It consists of three elements: left shoulder, head and right shoulder. The left shoulder tells us that the price rise is followed by a left price peak, and after that it’s followed by a decline. At the head, the price rises once again, this time forming a higher peak. At the right shoulder we have one more decline that it’s followed by a rise. This rise forms the right peak, which is lower than the head.

At market bottoms you can find inverse head and shoulders patterns – everything is the same, it just goes in the opposite direction. It’s also worth mentioning that these formations usually aren’t perfect. You will probably find some noise when looking for shoulders and a head. 

Head and Shoulders Pattern | How to trade?

As we have already said, the head and shoulders pattern is one of the most common patterns. However, in order to use it properly, you have to know how to interpret it in a proper manner. When we’re talking about the head and shoulders pattern, one thing is of great importance: it’s crucial to wait for the pattern to complete. Do not assume that a pattern will develop, and do not Trade Binary Options until the pattern breaks the neckline.

The most common entry is when a breakout occurs (when the neckline is broken), but there’s another entry point that also can be taken into consideration. You should wait for a pullback to the neckline after a breakout has already occurred. It will give you enough time to see if the pullback stops and the breakout direction resumes. On the other hand, you might also miss the trade if the price keeps moving in the breakout direction.

Head and Shoulders Patterns | Conclusion

The head and shoulders pattern is something you should definitely learn to use when conducting your analyses. It’s not so difficult to learn how to interpret it, you just have to have a lot of patience and wait for the entire pattern to complete. If you can learn that, we’re sure you will have much bigger chances to win!

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FURTHER READING:

1. Seasonality in the option market (A Dickinson, DR Peterson – 1989)
2. Technical Analysis Of The Financial Markets: A Comprehensive Guide To Trading Methods And Applications (J. Murphy, 1999)
3. Rich Dad, Poor Dad (R. Kiyosaki, 2000)
4. The Investment Checklist: The Art Of In-Depth Research (M. Shearn, 2012)
5. Come Into My Trading Room: A Complete Guide To Trading (A. Elder, 2002)

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Author: Ben Prescott
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