Market Terminology: What is the Head and Shoulders Pattern and How to Utilise it in Trading?

Market Terminology: The Head and Shoulders pattern is a well-known technical analysis formation in the stock market that indicates a possible price reversal. The pattern resembles a head with two shoulders on either side. The “left shoulder” emerges when a stock’s price rises and then falls, followed by a higher peak known as the “head,” and then the “right shoulder” forms with a lower high, identical to the left. This overall structure indicates that the upward momentum is fading, and the construction of the “neckline” — a support level connecting the lows between the shoulders and the head — is crucial. When the price falls below this neckline, it usually signals the start of a downtrend trend.

What is Inverse Head and Shoulders?

In contrast, the Inverse Head and Shoulders pattern is an upside-down variant that is frequently seen towards the end of a downtrend and indicates a probable bullish reversal. In this scenario, the price movement results in a low (left shoulder), a lower low (head), and a higher low (right shoulder), followed by a breakout over the neckline, signalling a potential upward shift. Traders frequently utilise these patterns to determine entry and exit locations, particularly when the neckline is breached. However, keep in mind that Head and Shoulders, like all chart patterns, are probabilities, and any investment choice should be based on solid research and it is recommended to take advice from a financial expert.