SYDNEY, AUSTRALIA--(Marketwire - Feb 1, 2013) - For technical analysts, when the head and shoulders pattern emerges on a given chart, you can almost sense the excitement in the air.
It's one of the most unanimously popular and tried technical trading patterns, and normally signifies a strong reversal in the current price trend.
But how do you read, identify, and trade the head and shoulders pattern? Let's take a brief look.
Typically, the head and shoulders pattern is characterised by the following:
- A price rise
- A subsequent decline
- A price rise that achieves higher highs than the previous rise
- Another decline
- A price rise that matches the high of the first price rise
- Emergence into strong downtrend that takes out the support or 'neckline'
Once the head and shoulders pattern is complete, a common method by technical analysts is to place buy orders just outside the 'neckline' to capitalise on potential breakouts to the upside. However, throwbacks can often occur, whereby the price fails to make its big move anticipated by the pattern and undergoes a brief but nonetheless alarming reversal.
Just like any other trading method, the head and shoulders pattern should only be used as an indicator, and not an exact science.
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