Head and Shoulders

A Head and Shoulders pattern has a swing high, a higher swing high, and a 3^rd swing high equal to the first. Two troughs separate each of the three peaks. Head and Shoulders form only during uptrends as a reversal pattern into a downwards trend. An up sloping line can be drawn between the first peak and second peak. A down sloping line can be drawn between the second peak and third peak. Another trendline can be drawn between the two troughs, called the neckline. The neckline should eventually be broken, after price falls.

Entry at completion of the third swing high is a high risk entry. Entry at the fall below the neckline is a low risk entry. The stop goes above the third peak, and the you scale the distance between your entry and the stop to your chosen maximum percentage of capital.

The volume on the rise of second peak should be lower than first peak, volume on the rise of the third peak should be lower than second peak’s volume. Volume must increase after price falls below the neckline.

Project the target level price will fall by measuring the distance from the highest peak to the neckline, then subtracting that distance from the neckline break. Price may move beyond or fall short of a take profit set at that level. Watch for swing lows near the projected distance to take profit.