Head and Shoulders.
And no, I am not talking about that famous shampoo brand. I am talking about yet another trading pattern that the time has come for us to learn about.
Head and shoulders are fairly easy to spot and it is also quite easy to learn how to use it to your advantage. Let’s look at the examples.
Here. The perfect example. We can see the three peaks – one on the middle is the highest one and it is the head, two others on the sides are the shoulders. The line beyond it all is a neckline.
Now, that is perfect, you would say, but what is the usage of this? Well, would you be surprised if I told you that you are looking at a downtrend waiting to happen? That’s right!
If you measure the distance between the top of the head and the neckline, that is usually the exact low on which the graph is going from the neckline downwards.
So – once again – the distance between the head and the neckline is going to be the same with the distance between the neckline and price drop.
There is also an inverse head and shoulders pattern. Which goes exactly as it sounds.
Here, the lowest point is the head and two other are the shoulders. Simple right? And yes. The-same-distance principle works here as well.
Look at the distance from the head to the neckline. We are going to see the growth of the same distance in just moment. Neat, huh? Up-trend spotting! Wooohoo!
This pattern can be seen forming after a long down-trend. Just like the regular one can be seen after a lengthy up-trend.
This is the perfect possibility to see a trend hitting your target and be all profitable, just like you always dreamt.
And also, no one forces you to close the trade after the trend was spotted. In case the trend is going in your direction, you can always just leave it open. But very carefully though.