The head and shoulders pattern is also recognized as a reversal formation trend. The trend follows in a proper pattern starting from a peak point (shoulder) and moving towards a higher peak (head), and then finally dropping to another peak (shoulder). A straight line is drawn that connects the two lowest points. This line is known as the “neckline.” The slope of this straight line can either move up or go down. When the slope is at the bottom position, more reliable signals are produced.
This example shows the exact pattern of head and shoulders.
The highest point in this pattern is the head which is at second peak. The two shoulders in this pattern also saw the peak point, but still it is lagging behind the point where the head reached.
Now we can use this information to insert an entry order at the bottom of the neckline.
Using this information, we can estimate a target by measuring the top point of the head until its neckline. The distance indicates the price movement when it breaks the neckline.
You can observe that once the price goes below the neckline, it prepares to make a move to at least stay between the head and neckline.
Inverse Head and Shoulders
As the name suggests, this is actually a making of head and shoulders. However, this time it will move from up to down.
At first, a line is formed, which is known as the valley (shoulder), and then this continues and passes through another valley (shoulder). Usually, these formations are built on the downward movements.
Now, you can observe that this is also like the basic head and shoulder pattern, but the only difference is in direction, which in this case is moving from top to bottom. Through this formation, an order can be placed with a long entry just above the neckline.
To achieve the desired target, the same head and shoulder pattern will be used. First, we need to estimate the distance from the head to the neckline. This distance usually indicates where the price will move once it falls below the neckline.
If you carefully hit your target, you will surely get the desired profits. However, there are some techniques related to trade management which you can use to lock your profits by keeping your trade open. You can do this easily if you feel that price is moving to your desired location.