The head and shoulders pattern is a chartist figure, that is, used in chartist analysis. This figure, which is drawn by the price of the quotation in the graph with its evolution, anticipates a change of trend in the quotation of a certain financial asset.
The head and shoulders pattern, for us to understand it, is one of the figures analyzed by chartists, that is, those who use chartist analysis. This figure, which is drawn on the graph with the evolution of the price of the asset, anticipates a change of trend after its appearance.
It is so named because the graph, as we will see later, represents a shoulder, a head, and another shoulder as if it were the torso of a human being. The head and shoulders pattern is one of the most representative and essential figures of chartist analysis. In this line, we talk about a very reliable figure that appears at the end of a relevant trend, which changes direction when the shoulder, head, and shoulder appear.
Chart Pattern and Chart Analysis
Before continuing, we must stop to know the chartism and chartist analysis. Since the head and shoulders is a chartist figure used in this type of analysis, it is convenient to know them in order to later deepen it.
Having said that, chartism, or chartist analysis, is, in essence, the branch of technical analysis that studies price charts, trying to find patterns that allow predicting the future price of a given asset.
When we refer to chartism, we are talking about that branch that tries to find patterns of behavior in the price of a given asset, which uses price charts. In this line, it should be noted that we are talking about technical analysis, that is, a branch of stock analysis that believes in the ability to predict future prices of assets based on the study of the graphics that draws the evolution of the price of these assets.
The head and shoulders are chartist figures, among those observed and contemplated by this type of analysis.
This type of analysis, by the way, is very used by those who practice day trading.
Graphic Representation of the Head and Shoulders
In a graph, a head and shoulders would be identified after seeing an evolution similar to that observed in the graph shown below. In other words, when the graph draws a figure similar to the one shown. As can be seen in the indications, you can see the shoulder, the head, and the other shoulder, thus drawing this important chartist figure.
Representation of the shoulder head shoulder
Inverted Shoulder Head Shoulder
Just like the shoulder head shoulder exists, so does the inverted shoulder head shoulder, or also called the bullish shoulder head shoulder.
Although they are different figures, in practice they anticipate the same thing: a trend Indicator. The difference is that if it is a bullish shoulder head shoulder, the change will be in one direction, while if it is a bearish shoulder head shoulder, the change will be in the opposite direction.
Representation of the inverted shoulder head shoulder
As can be seen in the graph, it is called inverted because the figure it draws is the same as the traditional shoulder head shoulder, but inverted. The drawing in this case reflects the torso but inverted.
Illustration of the Shoulder Head Shoulder Charts
To finish, let’s try to see a real example of head and shoulders in which, as this chartist figure anticipates, a change of trend takes place.
Here is an image extracted from the IBEX 35:
Acciona Quote (IBEX 35)
This manual head and shoulders, very clear and with the change of trend, is drawn by the quotation of the Spanish quoted Acciona, during the years 2007 and 2008.
How accurate is the head and shoulders pattern?
The head and shoulders pattern is a relatively reliable reversal pattern, but it is not 100% accurate. In some cases, the price of the asset may break below the neckline and then reverse course, continuing in the original trend.
Can the head and shoulders pattern be used in alongside other technical analysis tools?
Absolutely! Traders often combine the head and shoulders pattern with other indicators like volume analysis, trendlines, or Fibonacci retracements to strengthen their analysis and increase the probability of successful trades.
How can traders effectively manage risk when trading the head and shoulders pattern?
Risk management is crucial. Traders can set stop-loss orders just above the pattern’s neckline to limit potential losses if the market invalidates the pattern. Also, they can adjust position sizes and consider the overall market conditions to minimize risk exposure.