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Head And Shoulders Pattern

What is a 'Head And Shoulders Pattern'

In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal. The head and shoulders pattern is believed to be one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.

Explaining 'Head And Shoulders Pattern'

This pattern is comprised of three component parts:

Tug-of-War

Stock prices are the result of a continuous game of tug-of-war; whether a stock's price goes up or down is the direct result of how many people are on each team. Those who believe a stock's price will go up are called bulls, and those who believe the stock will go down are called bears. If more of a stock's shareholders are bears, then its price will go down as they sell their shares to avoid losing money. If more people are bullish, then the price will go up as new investors buy in to take advantage of the opportunity.

The Head and Shoulders Story

Like all charting patterns, the ups and downs of the head and shoulders pattern tell a very specific story about the battle being waged between bulls and bears.


Further Reading


Identifying noise traders: the head-and-shoulders pattern in US equities
papers.ssrn.com [PDF]
… dollar. Though that study agrees with the present study that head-and-shoulders trading is not rational, the results of the two papers contrast in an important way. Chang and Osler (1997) shows that the pattern is profitable …

The predictive power of “head-and-shoulders” price patterns in the US stock marketThe predictive power of “head-and-shoulders” price patterns in the US stock market
academic.oup.com [PDF]
… dollar. Though that study agrees with the present study that head-and-shoulders trading is not rational, the results of the two papers contrast in an important way. Chang and Osler (1997) shows that the pattern is profitable …

Head and shoulders: Not just a flaky patternHead and shoulders: Not just a flaky pattern
papers.ssrn.com [PDF]
… dollar. Though that study agrees with the present study that head-and-shoulders trading is not rational, the results of the two papers contrast in an important way. Chang and Osler (1997) shows that the pattern is profitable …

Identification of the head-and-shoulders technical analysis pattern with neural networksIdentification of the head-and-shoulders technical analysis pattern with neural networks
link.springer.com [PDF]
… dollar. Though that study agrees with the present study that head-and-shoulders trading is not rational, the results of the two papers contrast in an important way. Chang and Osler (1997) shows that the pattern is profitable …

Identification of technical analysis patterns with smoothing splines for bitcoin pricesIdentification of technical analysis patterns with smoothing splines for bitcoin prices
www.tandfonline.com [PDF]
… dollar. Though that study agrees with the present study that head-and-shoulders trading is not rational, the results of the two papers contrast in an important way. Chang and Osler (1997) shows that the pattern is profitable …



Q&A About Head And Shoulders Pattern


When do you see this type of behavior in the market place ?

You see this type of behavior when investors have lost confidence in the future performance of a company's stock .

Who are bulls?

Bulls believe in an upward movement of prices for stocks they own.

Who are bears?

Bears believe in downward movement of prices for stocks they own.

How does a stock's price go up or down?

Stock prices go up or down depending on how many people are on each team; bulls vs. bears.

Why would someone sell their shares if they were confident about its future performance ?

They would sell their shares if they were no longer confident about its future performance .

If you want to buy into an investment , what should you look for first ?

You should look at whether there is more bearish activity than bullish activity .

What are the three component parts of the head and shoulders pattern?

The three component parts of the head and shoulders pattern are stock prices, bullish-to-bearish trend reversals, and game of tug-of-war.

Who wins when there is more bearish activity than bullish activity ?

Prices will fall because there is more bearish activity than bullish activity .

What is a head and shoulders pattern?

A head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal.

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