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Sometimes a trader needs a pattern that does it all – identify reversals and determine price targets. The head and shoulders pattern offers just that and is easily identifiable on CAPEX charts available on all trading platforms. Below, we at CAPEX, will take you through the easily identifiable head and shoulders pattern for technical analysis.
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One of the best parts of trading at CAPEX is the access to all the trading tools available for performing technical analysis. Technical analysis is using trading tools to determine price movements, market sentiments, and trading timing. It is analysing statistical and historical data to seek trading opportunities. In a nutshell, it is using price history to determine which way the market is heading, or continuing, and deciding when to take a position.
How traders at CAPEX perform technical analysis is by reading and understanding charts and other trading tools. Charts are made up of bars or candlesticks and can be used to determine the price movements of a chosen instrument. There are hundreds of chart patterns that each tell a unique story and the head and shoulders pattern is a popular choice by technical analysis traders at CAPEX.
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When conducting technical analysis using the fantastic range of trading charts available at CAPEX, the head and shoulders pattern is used to try and predict trend reversals – either bullish or bearish ones. The head and shoulders pattern is actually one of the most reliable reversal patterns and is commonly implemented to signal the end of an upward trend. At CAPEX, the head and shoulders pattern is commonly used for stock trading and the pattern forms when a stock price rises to a peak, before declining back to its base price. The price then rises above the last peak before declining to its base once again. Finally, the price will rise once more, but this time to the initial peak level before declining to the baseline for a final time. Essentially, you should be looking at a higher peak, flanked by two peaks of similar height – kind of like a head and two shoulders!
You really can’t miss a head and shoulders pattern – it’s a very distinct pattern after all. It depicts the very real struggle between market bulls and bears. The very first peak and then decline represents a shift in momentum and might be an indication of the bullish reversal. The bulls, however, rally and attempt to drive the price up once more and this time push past the previous peak into a new high. The price will decline again but at a higher point indicating that the bulls have made some ground. The bull investors try a third and final time to push the price upwards, but this time fails to reach the first peak. This is the signal that the bullish attempt to drive the price up has failed and a bearish reversal will follow.
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The Head and Shoulders pattern can appear during any time frame and in any market. That means you can use this technical analysis pattern for trading any instrument offered at CAPEX. A trade can finally be made when you see the pattern has concluded – not before unless you’re a real risk-taker. The pattern may not develop at all or when partially developed it may not complete, so for this reason it is recommended at CAPEX to wait for the pattern to conclude. Watch closely and look for the pattern to break the neckline. The neckline is considered to be the line of support or resistance determined by strategy as the location to place trade orders. Placing a neckline for a head and shoulders pattern is relatively easy. Firstly, traders must locate the head and shoulders on the chart and then connect the lows created by the left shoulder and head. The most common entry point for trading the head and shoulders pattern will be the breakout – in this case when prices breakout from the neckline.
The inverse head and shoulders is exactly what you think it is – the head and shoulder pattern is on the bottom rather than the top and subsequently is used to predict reversals in downtrends. There are a few key characteristics that confirm the appearance of the inverse head and shoulders pattern:
The price should then rise through the resistance line and significantly more trading volume is typically observed at this time. That final movement over the neckline or resistance is crucial. It signals the completion of the reversal and the large spike in trading volume confirms the validity of the signal.
Unlike some patterns, the inverse head and shoulders pattern can indicate a profit target too. This is determined by measuring the distance between the bottom of the “head” of the pattern and the neckline and then projecting that same distance from the breakout. For example, if the measured distance between the head and neckline is 15 points, then traders would set a profit target of 15 points above the neckline of the pattern. Another tip for trading the inverse head and shoulders is to set a stop-loss order below the breakout candlestick.
The limitations to this pattern are observed in what strategy a trader implements. It can be traded both aggressively and conservatively, but it can backfire. Trading aggressively would be to place a buy order above the neckline of the inverse head and shoulders pattern in anticipation of the reversal. However, while this would mean catching the breakout at the start for maximum value, you wind up with high slippage if the breakout turns out to be false and the reversal doesn’t occur. Trading conservatively can result in less slippage, but you could miss the trade in the event of a pullback.
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Every trading tool has its ups and its downs but there are always clear reasons why they work in theory. While sometimes the market defies the analysis, here are the reasons why the head and shoulders pattern works in theory:
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Trading the head and shoulders pattern will undoubtedly be more successful if you practice your trades first. With the CAPEX demo trading account, traders can apply charts to real-life markets in real-time. Traders can then experience searching for head and shoulders patterns and identifying them when they appear. The CAPEX demo account is risk-free since it all deals in virtual currency and that means you won’t lose money if you incorrectly identify a head and shoulders pattern.
There are many ways to identify market price reversals and CAPEX has all the tools to make it happen. Performing technical analysis is a proven way to quickly and efficiently determine price movement and price target. Head and shoulders patterns are one of the most popular observations available for technical analysis at CAPEX. This pattern can not only signal a reversal but can also be used to determine how long the new trend will most likely last. That means this single, powerful pattern can guide traders in where to place stop-loss and target profit orders. Don’t forget to practice identifying head and shoulders patterns with the free CAPEX demo trading account by signing up to CAPEX today.