| Online Trading With The Head and Shoulders Top Pattern |
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| Written by Chris Blanchet |
| Sunday, 28 June 2009 14:21 |
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The Head and Shoulders Top is considered one of the most popular and reliable pattern when it comes to technical analysis. The reason for its popularity has to do with how easily new and seasoned investors can recognize it. And the reason it is considered one of the most reliable classic patterns is that it seldom produces false positives.
The Head and Shoulders Top is considered one of the most popular and reliable pattern when it comes to technical analysis. The reason for its popularity has to do with how easily new and seasoned investors can recognize it. And the reason it is considered one of the most reliable classic patterns is that it seldom produces false positives. Recognizing a Head And Shoulders Top Bluntly, the Head and Shoulders top patterns looks like a human head with two shoulders to each side. The left shoulder reaches a peak, then pulls back before rallying higher than the previous peak, then pulling back, and rallying a third time, though not higher than the second rally (the head). Each shoulder should rally to approximately the same levels as one another. When it comes to technical analysis, a head and shoulders pattern has a volume requirement as well. For the pattern to be legitimate, the first shoulder (rally) will rise on heavier volume than the head and right shoulder. More Technical Considerations Aside from the easily identified pattern that a head and shoulders top creates after the three rallies and the volume requirement listed above, investors should note that the left and right shoulders will peak at roughly the same price levels. As well, the investor can draw neckline between to the two pullbacks and this can slope upwards or downwards. If that neckline is upward-sloping, then the pattern is considered more bullish than a flat or downward sloping neckline. For a solid bearish trade, confirm a downward sloping neckline. As well, the Head and Shoulders top needs to meet other criteria as occurring above an appropriate moving average. Usually, the 50-day MA can be used, but it is not uncommon to use the 200-day MA for longer patterns. Also, the moving average trendline should be headed in the same direction as the head and shoulders pattern. In case it is not, then the investor should recognize that the pattern is a little less reliable. Trading The Head and Shoulders Top Since this is a bearish pattern, investors are advised to sell their position or take a short position in the underlying security. Investors who look to make trades based on the head and shoulders pattern should understand that the longer it takes for the pattern to develop, the longer it will take for the price to reach its target level. With this in mind, investors should also look at the inbound trend to determine whether it simply a period of consolidation or a legitimate head and shoulders. The rule of thumb here is that the inbound trend is longer than the trend of the pattern itself. Hundreds of head and shoulders patterns will take shape every day. The question is not normally whether the pattern exists but whether it is strong, reliable, and legitimate enough to make a trade decision. Since a fair degree of technical analysis knowledge is required, investors who prefer low-involvement relationships with their investing are often recommended to start with trading software and systems. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. With more than 16 years of experience as a Financial Advisor for one of the world's largest commercial banks, Chris Blanchet is responsible for the Free Technical Analysis Course at Online Trader Today.com. He also maintains a Debt-Free Blog at How To Repay Debt.com. |