![]() ![]() What Causes a Head and Shoulders to Form?Īll price action carries with it a message. Think of the neckline as the line in the sand between buyers and sellers. This level will become a key component when we get into how to trade the breakout. Now that we have a defined head and two shoulders we can draw neckline support. But because the pattern isn’t yet complete, it’s best to think of it as a rough draft rather than a final version. It’s an indication that buyers are tiring and that the market may be gearing up for a reversal.Īs soon as the right shoulder begins, we have enough to start plotting the neckline. The right shoulder is where things come together. The neckline is also beginning to take shape, but we need the right shoulder before we can draw the neckline on our chart. But despite the bullish rally, buyers are unable to make a substantially higher low.Īt this point, we have the left shoulder and the head of the structure. Now that the left shoulder has formed, the market makes a higher high which forms the head. At this point, things are starting to come together, but we don’t quite have enough to draw the neckline. The market moves down to form a higher low. ![]() ![]() This is the extended move higher that eventually leads to exhaustion.Īs a general rule, the longer the uptrend lasts, the more substantial the reversal is likely to be. The very first part of a head and shoulders pattern is the uptrend. Now let’s discuss each step in greater detail. Exclusive Bonus: Download the Head and Shoulders PDF Cheat Sheet that will show you everything you need to know to make money from this reversal pattern. ![]()
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March 2023
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