Head and shoulders
chart patterns
Stock market trading tip for trading chart patterns
Head and shoulders is popular stock chart pattern. It is well known and used by a lot of technical traders. Its usage is on every time frame, so daytraders are trading this chart pattern on intraday stock charts, swing traders like trading these chart patterns on daily charts and position traders like to see this pattern on weekly charts.
This stock chart pattern has two versions. One is bearish and it is typical head and shoulders chart pattern. Second one is inverse H&S chart pattern. Both have the same reliability.There are typical trading rules how to trade these stock chart patterns. You can find them in almost every good
stock trading book.
I have found also some advanced rules for trading chart patterns like H&S and you can find them below in the text.
Classic head and shoulders chart pattern
H&S chart pattern is a bearish reversal chart pattern. It finishes an uptrend move and starts a downtrend move.
The Left shoulder and head are created during an uptrend. The price retraces all the way down from the top of pattern, it means
100% retracement
of a head uptrend move. This is first warning sign. It shows that the uptrend is weak. Then, the right shoulder forms. A lot of supply is available from previous buyers in a head uptrend and creates a lower high, that is, the right shoulder. This is the last warning sign that the uptrend is finished.
Best online trading rules for H&S
The basic entry rule for trade based on this stock chart pattern is to enter short trade immediately after the breakdown of the neckline. You have to set the stop-loss above the neckline. As with all breakout strategies this is little bit risky.The aggressive type of entry is based on timing during the creation of the right shoulder. If you see volume confirmation and price stops around the highs of the left shoulder, you can enter short trade. The last version is more conservative and it’s expected that you will wait for a pullback, which has to happen after the breakdown of the neckline. Then, you will enter a short trade based on the
horizontal price resistance
of the neckline and the
downtrend line
connecting the head and right shoulder. This type of trade setup is described in this illustration:
The stop-loss level for every trade has to be set accordingly. It could be placed above the right shoulder or the head to avoid a situation where a trade setup based on this pattern will fail.
A typical target for such trade is value, which is lower in the same span from neckline as is the top of head above the neckline. You have also to consider a time frame for a possible trade based on this stock chart pattern. If you find it on five-minute chart, then you can expect that target can be achieved within several hours on the same day. If you see this pattern on a daily chart, then you have to trade for several days before achieving the target value.
Inverse head and shoulders pattern
This is a bullish version of this chart pattern. The same rules work for this version as for the bearish version above.
My head and shoulder chart pattern tip
Watch the volume.
It has to be lower during a rally in the right shoulder than in previous rallies during the head and left shoulder.
How to find H&S chart pattern
This type of stock chart pattern can be found using technical stock chart analysis in some good stock analysis software. I personally use
AmiBroker
where I visually looking for chart patterns.Here is typical example of this H&S stock chart pattern found on one stock in AmiBroker database.
AmiBroker
is very powerful stock analysis software. There is possible to use some tools and special scripts that are able to look for stock chart pattern like H&S automatically. You can also run special stock screener looking for stocks with detected stock chart pattern.
Return from Head and shoulders to stock chart patterns
Return from H&S stock chart pattern to simple-stock-trading.com
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