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- Head and Shoulder pattern is a bearish reversal pattern. This pattern appears after an uptrend.
- This pattern is formed with three consecutive tops with middle one being higher than the other two.
- The middle top is called the head and the two side peaks are called the shoulders.
- On joining the intermediate troughs, we get the neck-line. On ultimate break below the neckline, usually a short trade is taken with a stop-loss above the top of the nearest shoulder.
- The target is usually considered as the distance between the neckline and head, projected from the point of break.
- If the volume in the down leg of the right shoulder is on the higher side and break happens with high volume, the conviction is on the higher side for the reversal.
- An Inverse Head and Shoulder is just mirror image of the Head and Shoulder pattern.
- This should appear after a sustained down trend, the rule of stop loss and target are similar. This often acts as a very effective bullish reversal pattern.