V.3:4 (131-134): Head and Shoulders: An Introduction to Reversal Patterns by Timothy A. Maguire

V.3:4 (131-134): Head and Shoulders: An Introduction to Reversal Patterns by Timothy A. Maguire
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Head and Shoulders: An Introduction to Reversal Patterns by Timothy A. Maguire

"A picture is worth a thousand words"- Chinese proverb.

The first thing a novice to the stock market would likely notice about individual security prices is that they are not static. Continual change is the only true constant in the market. Being aware of this, technical analysts attempt to predict what changes will occur in individual stock prices. One of their specific goals is to determine when trend reversals are underway. Generally, when a stock is undergoing one of these reversals, either from an uptrend to a downtrend or vice versa, a characteristic pattern takes shape in the stock's price chart. It is important for newcomers to the field of technical analysis to familiarize themselves with these basic reversal formations and their significance in order to see trading opportunities. As an introduction to the topic, this article describes two of the most common reversal patterns: Head and Shoulders and Multiple Head and Shoulders.

Head and Shoulders Top

Head and Shoulders patterns are the most common and, many think, one of the most reliable reversal patterns. When this pattern occurs at the height of an uptrend, it is naturally referred to as a Head and Shoulders Top (HST). It is a formation which signals that the security's price has reached a top and will decline in the future. As the name indicates, the HST has a left shoulder, a head, and a right shoulder. The market action which forms an HST can be broken down into four phases:

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