Head and Shoulders
From The Free Forex Encyclopedia
The Head and Shoulders chart pattern is considered by many traders and analysts to be one of the most reliable and accurate of all reversal patterns.
The head and shoulders pattern reveals itself by a series of three highs with the Head represented as central high that is higher than the flanking peaks that form the shoulders.
The head and shoulders chart pattern essentially represents a rally to a new high, followed by a decline, then a marked uptrend forming the second, central high before a second decline and final rally that inevitably fails once again.
A ‘neckline’ may most frequently be drawn through the pattern at the lows of one ‘shoulder’ to the other. With the head and shoulders pattern a breakout through this line represents a good sell opportunity whereas with its counterpart, the inverted head and shoulders pattern, a breakout through this line (the neckline representing the downtrend) would indicate a good buy opportunity.
Typically this chart pattern takes two or three months in order to fully develop, although this can also be significantly longer. Once the head and shoulders pattern has been confirmed it should be considered an excellent time to short sell.