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Technical Analysis Guide

Reversal Chart Patterns - Head and Shoulders

Price chart analysis starts with chart patterns. When you track price movements you may often see that these movements have predictable configurations - these are called chart patterns. Chart patterns are tools used to predict trend reversals or trend continuations.

Let's begin with chart reversal patterns - "Head and Shoulders" and "Inverted Head and Shoulders".

"Head and Shoulders" is the most recognizable reversal pattern. "Head and Shoulders" pattern appears at the end of a bullish trend:

Head and Shoulders pattern

"Inverted Head and Shoulders" is the first sign that a bearish trend is about to end:

Inverted Head and Shoulders pattern

Inverted chart patterns have distinct highs (bottoms). Head Line is a trend line which joins two bottoms between highs (two highs between two bottoms if the pattern is inverted).

Pattern characteristics:

• if on the bearish trend there is an "Inverted Head and Shoulders" pattern, then the higher the Right Shoulder the stronger the signal;
• if on the bullish trend the Right Shoulder of the "Head and Shoulders" pattern is higher than the left one, then this makes the signal stronger;
• in order to define whether the pattern is valid, volume levels must also meet fairly strict requirements.

Once the Head Line has been broken, it is time to open a position. The best time to place a trade is when the level has been broken and the price rebounds to the Head Line.

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