Term

Head and shoulders formation

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Head and shoulders formation is a reversal formation whereby the market appears to be in an upward trend then makes a lower high. The two previous highs are higher than each other then the market makes a lower high. This formation gives an illusion that the market made a shoulder and a head and another shoulder (Hence the term head and shoulders). So its two shoulders equal to each other and a head that stands out from both shoulders by its size in proportion to the shoulders. This becomes a reversal pattern because the market was in a clear uptrend making higher highs, but upon the market making a lower high. This is an indication that the market is exhausted or the momentum is dying out. So a break of the neckline, a lateral support drawn on the low of the bigger rally (the head) will trigger a head and shoulders pattern trade click here for more information.

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