Head and Shoulder Pattern

This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the currency pair is likely to move against the previous trend. As you can see in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.

Head and shoulders bottom, or inverse head and shoulders, is shown on the right

Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 11, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance.

Remember that an upward trend is a period of successive rising highs and rising lows. Therefore the head and shoulders chart pattern, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows.