Many of the educational posts out there are mere examples of past chart patterns that have already completed themselves. Which this is an excellent way to study data and to help predict future movements, it tends to create over-confident traders.
As many of us know that there is no 100% guarantee to any chart pattern. However many people, myself included, sometimes become too stuck on one pattern and its outcome, and to not fully recognize the fact that it can fail.
Leading to why I decided to make this educational post, whether this pattern completes itself or not, it is here to show you what trading is actually like.
The chart above displays a textbook Head and Shoulders Bottom (also called Inverse Head and Shoulders) pattern forming. However, this pattern has yet to fully complete itself, and even if it does, it may or may not hit our preferred target.
But lets break down the fundamentals of a Head and Shoulders Bottom.
Prior Trend: The reason it is called a head and shoulders bottom pattern, is because it occurs after a previous downtrend. So we first must check that the trend is down before considering this pattern.
The Body: The reason it is called a head and shoulders pattern is due to its shape. The head is ALWAYS the lowest point in this pattern, while the left and right shoulders sit at similar levels above the head. All three of these points then share the same resistance level know as the neckline.
Neckline: The neckline forms by connecting the highs following the left shoulder and the head of the pattern. This line can slope up, slope down, or be horizontal. This is the key level to break in this pattern.
Right Shoulder: There seems to lots of controversy with the right shoulder, some believe that this level must at the exact same or higher level than the left shoulder. However this is not the case. While symmetry is preferred, sometimes the shoulders can be out of whack, and the right shoulder will be higher, lower, wider, or narrower.
Volume: Since this pattern forms on the bottom of bear trends, there should be heavy selling volume on the left and right shoulders, while the right shoulder should be accompanied by light selling pressure.
The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.
Neckline Break: In order for this pattern to complete itself. There MUST be a break above the neckline. Otherwise the neckline remains resistance the the trend continues downwards.
Confirmation: Some believe the the neckline break serves as confirmation. However the real confirmation is once the neckline which once acted as resistance, later acts as support.
Target: The preferred target may be measured by taking the distance from the bottom of the head up to the neckline. While this is just a preferred target, one must consider other possible resistance levels.
Remember, even with all the patterns out there, there is never a 100% guarantee in trading.
I wish you all the best of luck!
I Hope you all found this educational post intresting and maybe even a little helpful!
DISCLAIMER:
Please note I am only providing my own trading information for your benefit and insight to my trading techniques, you should do your own due diligence and not take this information as a trade signal.
As many of us know that there is no 100% guarantee to any chart pattern. However many people, myself included, sometimes become too stuck on one pattern and its outcome, and to not fully recognize the fact that it can fail.
Leading to why I decided to make this educational post, whether this pattern completes itself or not, it is here to show you what trading is actually like.
The chart above displays a textbook Head and Shoulders Bottom (also called Inverse Head and Shoulders) pattern forming. However, this pattern has yet to fully complete itself, and even if it does, it may or may not hit our preferred target.
But lets break down the fundamentals of a Head and Shoulders Bottom.
Prior Trend: The reason it is called a head and shoulders bottom pattern, is because it occurs after a previous downtrend. So we first must check that the trend is down before considering this pattern.
The Body: The reason it is called a head and shoulders pattern is due to its shape. The head is ALWAYS the lowest point in this pattern, while the left and right shoulders sit at similar levels above the head. All three of these points then share the same resistance level know as the neckline.
Neckline: The neckline forms by connecting the highs following the left shoulder and the head of the pattern. This line can slope up, slope down, or be horizontal. This is the key level to break in this pattern.
Right Shoulder: There seems to lots of controversy with the right shoulder, some believe that this level must at the exact same or higher level than the left shoulder. However this is not the case. While symmetry is preferred, sometimes the shoulders can be out of whack, and the right shoulder will be higher, lower, wider, or narrower.
Volume: Since this pattern forms on the bottom of bear trends, there should be heavy selling volume on the left and right shoulders, while the right shoulder should be accompanied by light selling pressure.
The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.
Neckline Break: In order for this pattern to complete itself. There MUST be a break above the neckline. Otherwise the neckline remains resistance the the trend continues downwards.
Confirmation: Some believe the the neckline break serves as confirmation. However the real confirmation is once the neckline which once acted as resistance, later acts as support.
Target: The preferred target may be measured by taking the distance from the bottom of the head up to the neckline. While this is just a preferred target, one must consider other possible resistance levels.
Remember, even with all the patterns out there, there is never a 100% guarantee in trading.
I wish you all the best of luck!
I Hope you all found this educational post intresting and maybe even a little helpful!
DISCLAIMER:
Please note I am only providing my own trading information for your benefit and insight to my trading techniques, you should do your own due diligence and not take this information as a trade signal.
Creator of DepthHouse Indicators on TradingView!
↣ depthhouse.com/
↣ depthhouse.com/
