How to Spot and Trade a Head & Shoulders Pattern
Learn to use this classical charting pattern on your charts
by Vadim Pokhlebkin
Updated: August 26, 2014
Senior Analyst Jeffrey Kennedy is the editor of our Trader's Classroom service and one of our most popular instructors. This article is part 2 in our 6-part series, Find Trading Opportunities in Any Market. You can browse all articles here. In this lesson, Jeffrey shows you how to use one of the most common old-school chart patterns to identify opportunities on your charts.
My primary tool as a technical analyst is, of course, the Wave Principle. Even so, I find great value in other forms of technical analysis, such as candlesticks and indicators. With this in mind, let's review one of my favorite old-school chart patterns -- Head-and-Shoulders.
This formation was popularized by Edwards and Magee in their seminal work Technical Analysis of Stock Trends. It is a reversal pattern and consists of a left shoulder, a head and a right shoulder.
A trendline drawn between the price extremes of the left shoulder and head and head and right shoulder is referred to as the neckline. The neckline is important for two reasons -- the first being that a parallel of the neckline drawn against the extreme of the left shoulder can identify the extent of the formation of the right shoulder.
The second important aspect of the neckline is that it can provide a high probability target for the subsequent breakout. If prices decisively penetrate the neckline, the distance between that point and the head is often a reliable objective for the ensuing price move. Watch the 4-minute video where I explain more.
Watch Introduction to the Wave Principle Applied
In this free 15-minute video, EWI Senior Analyst Jeffrey Kennedy explains how to take the Wave Principle and turn it into a trading methodology. You'll learn the best waves to trade, where to set your protective stop, how to determine target levels, and more.