It is one of the most reliable and accurate reversal pattern considered by many analyst and traders. The head and shoulders pattern is series of three highs, outside two highs are close in height named shoulders and central is the highest called head. In technical analysis, it is most significant bullish to bearish reversal pattern, which indicate that upward market trend is nearing its end.
The head and shoulders pattern is comprises of three parts:
- After a long bullish trend, the price of commodity or currency pair increase to a peak and then drop to form a through.
- After decline, price rise again to form a second high above the first high and decline again.
- Price rise again for 3rd time to form a third high but only to the level of 1st high, before declining once more.
The first and third high called shoulders while second high is head.