Page 11 - Module & Head and Shoulders

Module 7 – Head and Shoulders

Trade Tip #5
If you have to question the validity of a pattern, it probably isn’t worth the risk.

8. Head and shoulder cheat sheet

Price does not continue rising all the time or falling all the time. There will be times when it will

Head and Shoulders Top
A HS top is formed when the price makes a high, pulls back, makes a higher high, pulls back, and
then makes a lower swing high. This creates three peaks, with the one in the middle being the
highest. The topping pattern is typically only relevant if seen after a substantial advance.
Connect the two lows within the pattern with a trendline. This is the "neckline." If the neckline is
angled up, traders will often enter short positions, or sell long positions, when the price falls below
the trendline after the third peak. If the neckline is flat or angled down, traders will enter short
positions, or sell long positions, when the price falls below the latest pullback low. When the price
falls below the neckline, or latest pullback low, it is called a breakout. The breakout indicates the
pattern has completed and the price will likely proceed lower.

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