Head and shoulders patterns are formations that indicate the reversal of a current trend, specifically a bullish to bearish reversal.
Inverse head and shoulders patterns indicate the opposite, a bearish to bullish reversal.
As aforementioned throughout the pattern series, you will also find the head and shoulders pattern everywhere if you become too attached to it.
Many inexperienced traders will be too hasty to assume that these patterns are certain to play out, and will often enter these ranges incorrectly.
Head and shoulders patterns are formations that indicate the reversal of a current trend, specifically a bullish to bearish reversal.
Inverse head and shoulders patterns indicate the opposite, a bearish to bullish reversal.
As aforementioned throughout the pattern series, you will also find the head and shoulders pattern everywhere if you become too attached to it.
Many inexperienced traders will be too hasty to assume that these patterns are certain to play out, and will often enter these ranges incorrectly.
In this tutorial our lead analysts will go through their bespoke criteria to confirm a head and shoulders formation, these include; volume and the potential incorporation of a flag within the pattern.
More importantly, you will learn where the ideal place to enter in such a pattern, in accordance with confluence and risk management.
NOTE: On the BTC market especially, these patterns are ripe with fake-outs and stop hunts. Do not look to trade on this pattern alone, you will always be reminded that confluence is key.
Key Points of the Lesson
UTILITY
Head and Shoulders pattern is a top reversal pattern.
Inverse Head and Shoulders pattern is a bottoming pattern.
The Three Peaks pattern has a completely different volume profile, not to be confused with a head and shoulder pattern.
HEAD AND SHOULDERS
Head and Shoulders patterns are formed by three peaks:
Left shoulder
Head
Right shoulder
Volume should decline as the pattern develops with an increase in volume on the bearish breakdown.
Price target can be found by extending the height of the head from the neckline.
INVERSE HEAD AND SHOULDERS
Inverse Head and Shoulders patterns are formed by three peaks:
Left shoulder
Head
Right shoulder
Volume should decline as the pattern develops with an increase in volume on the bullish breakout.
Price target can be found by extending the height of the head from the neckline.
THREE PEAKS PATTERN
Formed by three peaks.
Volume profile does not match the Head and Shoulders requirements.
There is no measured move price target.
HEAD AND SHOULDERS THEORETICAL EXAMPLE
INVERSE HEAD AND SHOULDERS PRACTICAL EXAMPLE
THREE PEAKS PATTERN PRACTICAL EXAMPLE
TIPS & TRICKS
Volume is very important on the breakout / breakdown.
Low volume breakout / breakdown ⇒ pattern invalidated, watch out for a fake out!
H&S Patterns play out better on higher timeframes.
COMPLEX HEAD AND SHOULDERS PATTERN
Same rules apply as with the normal H&S pattern.
Two possibilities:
Two left and two right shoulders with one head.
One left and one right shoulder with two heads.
You can have complex H&S top reversals and complex inverse H&S bottom reversals.
TIPS & TRICKS
Can be used in Elliott Wave theory:
Corrective and Impulse waves together can form Three Peaks and Head and Shoulder patterns.
The overall pattern and the individual waves and impulses can be traded.
TAKE HOME MESSAGE.
H&S are reversal patterns
Target height of the head from the breakout
Volume in the pattern and upon breakout / breakdwon is key.