The head and shoulders pattern is a technical chart pattern used by traders to identify a potential trend reversal in price action. It is named for its resemblance to a head and two shoulders, formed by three peaks in price action separated by two dips.
The pattern consists of three distinct parts:
Left shoulder: A peak in price action followed by a dip.
Head: A higher peak in price action followed by a dip.
Right shoulder: A peak in price action followed by a final dip.
The pattern is complete when the price breaks through the "neckline," a support level that connects the dips in the left and right shoulders. The breakout below the neckline is seen as a signal of a potential trend reversal, indicating that the price may continue to decline.
Traders often use the head and shoulders pattern in combination with other technical analysis tools to confirm their analysis and make more informed trading decisions.
