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Head and Shoulders Pattern

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The head and shoulders pattern is a bearish trend reversal signal. It is a commonly used trading pattern that observes the rise and fall of price during an uptrend. The pattern resembles a human head and shoulders, which is why it is given its name. It consists of three peaks followed by two valleys. The middle peak is the highest peak and the two other peaks are roughly equal in height, or the left peak is slightly higher than the right peak. It forms when a larger move is followed by two smaller corrective moves. The most reliable signal of the head and shoulders pattern is a break below the neckline.

The head and shoulders pattern is one of the most reliable trend reversal indicators. When the pattern is confirmed, it suggests that the uptrend is coming to an end and a bearish trend is beginning. The pattern can form over different timeframes, from short-term intra-day charts to long-term weekly and monthly charts. The neckline is the support or resistance line that the price breaks through to confirm the pattern. It marks the point where the resistance or support becomes weaker. A break below the neckline suggests that the reversal is confirmed and the price is likely to move lower.

The head and shoulders pattern is a reliable indication that a trend is changing direction. The pattern is often used to identify potentially profitable entry and exit points in the market. Traders looking to buy should wait for the neckline to be broken before entering a position. And traders looking to sell should wait for the neckline to be broken before exiting their position. It is important to remember that not all head and shoulders patterns are reliable and traders should wait for confirmation before taking any action.

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