Reversal Chart Patterns: Head and Shoulders & Reverse Head Shoulders

Head and shoulders Indices Trading Pattern

This is a reversal trading pattern which forms after an extended Stock Indices Trading upwards stock index trend. It is made up of three consecutive peaks, the left shoulder, the head and the right shoulder with two moderate troughs between the shoulders.

This stock indices pattern is considered complete once stock index price penetrates and moves below the neckline, which is drawn by joining the two troughs between the shoulders pattern.

To go short, Stock Indices traders place their sell stop stock index trade orders just below the neck line.

Summary:

• This Stock Indices Trading pattern forms after an extended move upward
• This formation indicates that there will be a reversal in stock indices market
• This formation resembles head with shoulders thus its name.
• To draw the neck-line we use chart point 1 and point 2 as shown below. We also extend this line in both directions.
• We sell when price breaks out below neck line point: see the chart below for explanation.

Or the head & shoulders can also form on a slanting neckline, like the stock indices example illustrated below:

Examples of Head and Shoulders Pattern on a Stock Indices Chart

Head and Shoulders Pattern

This stock indices pattern can also be formed on a slanting neckline, like the one above, the neck-line does not have to be necessarily horizontal.

Reverse Head & Shoulders Trading Pattern

This is a reversal head and shoulders pattern which forms after an extended Stock Indices Trading downwards trend. It resembles an upside-down head shoulders.

This stock indices pattern is considered complete once stock index price penetrates above neckline, which is plotted by joining these 2 peaks between the reverse shoulders pattern.

To go long buyers place their buy stop stock index trade orders just above neck line.

Summary:

• This Stock Indices Trading pattern forms after an extended move downward
• This formation indicates that there will be a reversal in stock indices market
• This formation resembles upside down, thus the name Reverse.
• We buy when price breaks-out above neck line point: see the chart below for explanation.

Example of Reverse Head & Shoulders Pattern on a Stock Indices Chart

Example of Reverse Head & Shoulders Pattern