What is Head and Shoulders Pattern

The Head and Shoulders pattern in the stock market is basically a formation of three peaks on the chart, where the first and the third peak is equal in size and the central i.e. second peak is higher. Notably, the chart foresees a bullish – to – bearish trend reversal.  

Whenever, the price of the stock reaches a peak and reverts to its previous trend, the Head and Shoulders chart pattern is formed. Next the price rises above its previous peak and makes a ''nose'' before settling to its actual position.

Later, the price rises once again, but it stays at the same position of the first peak, before it declines once again based on the neckline or chart pattern.

The Head and Shoulders are considered to be a accurate and significant trend reversal patterns.

What these patterns tell us?

The price declines subsequently, after it rises to a peak after long bullish trends.

Its rise again and achieves a same height which is higher in as compare to earlier peak and declines again.

The amount declines again for the third time after rising and settles at the level of first peak.

Now, in the chart form, the peaks with the similar heights are known as shoulders, while second peak in the middle are known as head as it is higher as compare to two. The line which is equal for the first and second troughs is known as the neckline.

Inverse Head & Shoulders:

It is nothing but the opposite of the said chart. It is also known as head and shoulders bottom. Here, the head is inverted while the shoulders are on top to foresee reversals in downtrends.

For example, an inverted pattern appears when the price of the stock falls into a trough before rising again. The pattern reappears when the price comes down below the prior trough and rises again before the last drop. But the growth is not as much as the other troughs. Upon forming the last trough, the price of the stock begins to move upward, towards resistance that is found near the top of the previous trough.

Last trough, the stock price begins to move upward, towards resistance that is found near the top of the previous trough.