Online Trading With The Head and Shoulders Top Pattern
As far as Classic Patterns in technical analysis go, the Head and Shoulders Top formation has got to be one of the most popular and reliable. It is popular because new and seasoned investors can recognize it and reliable because it rarely produces a false positive.
What a Head And Shoulders Top Looks Like Quite simply, the Head and Should Top pattern resembles a human. The head (the highest peak) has two shoulders on each side (smaller peaks). The patterns is formed when a rally experiences a pull-back, followed by another rally that reaches a higher high than the last, and then a third rally (the right shoulder) that reaches the same left as the first (left shoulder).
Technical analysis will take this one step farther by stipulating volume requirements. Essentially, the first peak (left shoulder) will see the heaviest volume as the stock increases. The head and right shoulder will show diminished volume.
Technical Considerations In addition to the visual representation of the three rallies with the second reaching higher and the volume requirement, the head and shoulders top should also have a degree of symmetry where the two shoulders peak at approximately the same price levels. In addition, the neckline, which joins the pullbacks between rallies, can slope up or down, with downward sloping necklines being more bearish and, therefore, more ideal for investors looking to profit from weakness.
Another key point is that the pattern should take shape above a comparable moving average (MA). Typically, the 50-day moving average will work just fine, but investors are advised to use the 200-day moving average for longer-term patterns. And speaking of Moving Averages, the MA should be trending in the same direction as the Head and Shoulders top. If it doesn't, then it simply means the pattern is less reliable.
Trading Considerations Given the bearish implications, traders are advised to sell or go short. When trading based on this technical pattern, investors need to recognize that the longer it took for the pattern to develop, the longer it will take for the price to hit its target. Lastly, investors should also search out longer inbound trends than the duration of the pattern itself, which suggests that the pattern is not simply a period of common consolidation.
The head and shoulders pattern will form on hundreds of securities daily. The question is not whether the pattern exists, but the reliability and strength of the pattern and whether it is strong enough to trade. Given the knowledge needed to properly identify a head and shoulders top, beginning investors and people who demand a more hands-off approach will opt to use trading software and systems instead. - 23222
What a Head And Shoulders Top Looks Like Quite simply, the Head and Should Top pattern resembles a human. The head (the highest peak) has two shoulders on each side (smaller peaks). The patterns is formed when a rally experiences a pull-back, followed by another rally that reaches a higher high than the last, and then a third rally (the right shoulder) that reaches the same left as the first (left shoulder).
Technical analysis will take this one step farther by stipulating volume requirements. Essentially, the first peak (left shoulder) will see the heaviest volume as the stock increases. The head and right shoulder will show diminished volume.
Technical Considerations In addition to the visual representation of the three rallies with the second reaching higher and the volume requirement, the head and shoulders top should also have a degree of symmetry where the two shoulders peak at approximately the same price levels. In addition, the neckline, which joins the pullbacks between rallies, can slope up or down, with downward sloping necklines being more bearish and, therefore, more ideal for investors looking to profit from weakness.
Another key point is that the pattern should take shape above a comparable moving average (MA). Typically, the 50-day moving average will work just fine, but investors are advised to use the 200-day moving average for longer-term patterns. And speaking of Moving Averages, the MA should be trending in the same direction as the Head and Shoulders top. If it doesn't, then it simply means the pattern is less reliable.
Trading Considerations Given the bearish implications, traders are advised to sell or go short. When trading based on this technical pattern, investors need to recognize that the longer it took for the pattern to develop, the longer it will take for the price to hit its target. Lastly, investors should also search out longer inbound trends than the duration of the pattern itself, which suggests that the pattern is not simply a period of common consolidation.
The head and shoulders pattern will form on hundreds of securities daily. The question is not whether the pattern exists, but the reliability and strength of the pattern and whether it is strong enough to trade. Given the knowledge needed to properly identify a head and shoulders top, beginning investors and people who demand a more hands-off approach will opt to use trading software and systems instead. - 23222
About the Author:
With more than 16 years of experience as a Financial Advisor for one of the world's largest commercial banks, Chris Blanchet is responsible for the Free Technical Analysis Course at Online Trader Today.com. He also maintains a Debt-Free Blog at How To Repay Debt.com.
posted by X - Men @ 3:24 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home