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Bearish Head and Shoulders Example!
Okay, so we talked about what the Head and Shoulder formation is, but it's time to have a look at how this popular reversal pattern works!
In this example, we’ll be looking at a bearish reversal pattern, in an uptrend of course.
Remember that an uptrend is defined as a series of successively higher tops and higher bottoms, correct? Correct!
So, as you might have guessed, the minimum requirement for an uptrend is two successively higher tops and two higher bottoms and the price exceeding the second top. Perfect!
In the case of the Head and Shoulders pattern, there are three tops. The highest top is the one in the middle and is known as the head, the lower top to the left of the head is the left shoulder, and the lower top to the right of the head is known as the right shoulder.
It pretty much looks like this:
You get the picture, right? Awesome!
The Head and Shoulders pattern also consists of two bottoms that are formed after a correction from the left shoulder and the head respectively.
The last part of the head and shoulders is the so-called neckline which is formed by connecting the two bottoms.
Now, let’s have a look at the below graph.
You can see that there’s a decisive break below the neckline. This signals the end of the uptrend and the beginning of a new trend to the downside!
Usually, this is an opportunity to place a potential sell order at the breakout of the neckline where a protective stop loss is seen at the right shoulder.
So now, we have both looked at how the Head and Shoulders reversal works, as well as a potential sell setup!
Let’s check out the bullish side of things!
