Head and Shoulders formation
Formation of the head and shoulders belongs to the classics
of technical analysis and is one of the basic price structures reversing the
upward trend. This price structure consists of three peaks shaped at the top of
the upward trend. The left peak (left shoulder) and the right top (right
shoulder) are shaped at a slightly lower level than the central maximum (head).
Full formation education occurs after determining four
characteristic points (1,2,3 and 4). Points (1) and (3) indicate the formation
arms, point (2) means head. The last, fourth point is determined after piercing
the neck line (marked with a thin blue line).
The maintenance of the volume of turnover is a very
important element in shaping this price structure.
- The amount of rotation during shaping the head should be less than during shaping the left arm. This behavior of turnover is the first sign of weakening of the upward trend.
- The right arm should be shaped on an even smaller volume of rotation.
- The price drop below the neck line should take place on the increased turnover volume, which proves the aggressive approach of the supply side, which quickly satisfies the reported demand at ever lower price levels.
The possible return of the price to the height of the neck
line should take place with definitely lower turnover.
The confirmation of the formation is a
subsequent price decline confirmed by a large volume of trade. The minimum extent of
the decline is calculated by measuring the height of the formation from the neck
line down.
The size of the price movement after breaking the formation
(measured from the breaking point - red dot) should be at least equal to the height
of the head above the neck line (purple line).
Note 1: The neck line does not have to be horizontal.
Note 2: It is possible to "mutations" form the
head and shoulders, e.g. two heads.
If you have shares:
sell if the price drops at least 5% below the neckline
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