Head-and-Shoulders Pattern: Entry, Stop & Target
What is the Head-and-Shoulders Pattern?
The head-and-shoulders pattern is a chart pattern in trading. It helps traders see when to buy or sell stocks. This pattern looks like a person’s head and shoulders.
There are two types of head-and-shoulders patterns: the regular and the inverse. The regular pattern shows a price rise, while the inverse shows a price fall.
How Does the Head-and-Shoulders Pattern Work?
The head-and-shoulders pattern has three main parts. These parts are the left shoulder, the head, and the right shoulder.
- Left Shoulder: The price rises and then falls.
- Head: The price rises higher than the left shoulder and then falls again.
- Right Shoulder: The price rises again but not as high as the head.
After the right shoulder, the price usually falls. This is when traders look to sell.
When to Enter a Trade
Traders enter a trade after the pattern is complete. This means the price has fallen below the neckline. The neckline is a line drawn under the left shoulder and the right shoulder.
It is important to wait for the breakout. A breakout is when the price moves below the neckline. This shows that the price is likely to keep falling.
Setting a Stop Loss
A stop loss is a way to protect money. It is an order to sell a stock if the price goes up too much. For a head-and-shoulders pattern, set the stop loss above the right shoulder.
This way, if the price goes up, you can limit your losses. It is smart to keep your stop loss close to your entry point.
Setting a Target Price
After entering a trade, it is good to set a target price. The target price is where you want to sell for a profit. To find the target price, measure the height of the head.
Then, subtract that height from the neckline. This gives you an idea of how far the price might fall.
Comparison of Head-and-Shoulders Patterns
| Type | Description | Market Direction |
|---|---|---|
| Regular | Price rises, forms a head, and then falls. | Bearish (downward) |
| Inverse | Price falls, forms a head, and then rises. | Bullish (upward) |
Conclusion
The head-and-shoulders pattern is a useful tool for traders. It helps them know when to enter and exit trades. By understanding this pattern, traders can make better decisions.
FAQ
What is a breakout?
A breakout is when the price moves past a certain level, like the neckline in a head-and-shoulders pattern.
How do I identify a head-and-shoulders pattern?
Look for three peaks: the left shoulder, the head, and the right shoulder, with a neckline below them.
Can the head-and-shoulders pattern fail?
Yes, sometimes the pattern does not work. Always use a stop loss to protect your money.
The head-and-shoulders pattern helps traders make smart choices in the market.
