How to Invest with Head and Shoulder Technical Analysis

Author: James Clark

Do you want to learn how to invest using head and shoulder technical analysis? We share everything that you should know about it right here.

Stock market analysts and traders constantly study patterns and trends when watching the market, hoping to detect the next price movement. Correctly spotting and identifying trends and patterns, and understanding their importance, holds the key for successful trading and investing. The head and shoulder trading pattern is crucial due to its extensive history of being reliable for market analysis. This article will discuss the head shoulder pattern, explain its importance, and how traders can use it to invest and profit from it.

The Basics of the Head and Shoulder Pattern

When looking at it from a technical analysis point of view, the head and shoulder pattern is a predicted chart formation, which indicates a reversal of trends when the market shifts from bearish to bullish or vice-versa. The head and shoulder pattern has been praised as one of the most reliable patterns for predicting trend reversals in the market.

However, you should know that the head and shoulder pattern isn’t perfect, and there will be price fluctuations between the head and shoulders. The pattern formation is also rarely in the perfect shape, which makes it difficult to use.

The Inverse Pattern of the Head and Shoulder

The head and shoulder pattern can be formed in the opposite direction, which will signal a trend change and market reversal from bullish to bearish. That is also called an inverse head and shoulder pattern and is technically an upside-down head and shoulder pattern. You can use the inverse pattern when making investments as it signals that the market has transitioned into an upward trend from a downward trend.

When there is an inverse head and shoulder pattern, the stock prices will fall into three lows, separated by two short-term periods of price rallying. The inverse pattern head, the middle trough is the lowest, and the shoulders won’t be deep. When the second shoulder forms, the prices will rally one last time to break above the neckline and indicate the bearish trend's reversal and that bulls are controlling the market.

Using the Head and Shoulder Pattern to Invest

Before you decide to invest using a head and shoulder pattern, you should let the pattern complete itself. You shouldn’t be investing when the head and shoulder pattern is in the middle of the formation, assuming that it will develop fully in the manner you are predicting. The market constantly changes, which is why you must be patient and wait for the trends to develop fully before investing and trading.

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