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Reverse Head and Shoulders: Forex Chart Pattern

The Head and shoulders graphical price pattern signals the end of trend and the following change in direction of the asset’s price. It is typically formed in a developed uptrend.

Formation

This pattern is represented by three tops of the market price located at different levels: two lower tops (shoulders) aside and one highest top (head) in between. There is also a neckline (support) connecting pattern’s lows.

Head and Shoulders Pattern

Interpretation of Head and Shoulders

Once the pattern is formed and the price falls below the neckline or support level (plus a certain deviation is possible), investors get a sell signal. The expectation is that the decline will continue, although prices may rebound to the neckline, considered now a resistance, but generally stop around it.

Target price

Following head and shoulders pattern formation the price is generally believed to drop at least to its target level, calculated as follows:

T = N – (H – N),

Where:

T – target level;

N – neckline level (initial support);

H – pattern’s head level (highest top).


You can see the graphical object on the price chart by downloading one of the trading terminals offered by IFC Markets.