What is a head and shoulders chart pattern?

The pattern was first described by Charles Dow in the 1900s, although it was not named until the 1930s. The head and shoulders chart pattern is used in technical analysis, often identifying the turning point of a trend. It is identified by three peaks; the middle peak, or head, is the highest and is flanked by two lower peaks, the shoulders.

How reliable is a head and shoulders chart?

The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns. How Reliable Is a Head and Shoulders Pattern?

What is the opposite of a head and shoulders chart?

The opposite of a head and shoulders chart is the inverse head and shoulders, also called a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics:

When should you use a head and Shoulders pattern?

For example, if an investor buys a stock at $40, and the price goes down more than 10%, the loss is limited to only a maximum of 10%. When using the head and shoulders pattern to indicate when to enter or exit a trade, it is essential to wait until it is complete as it might not develop fully in the future.