HEAD AND SHOULDERS (H&S)
Usefulness: making a SELL decision
Forming time: from several weeks to several months
Volume: decreases (detailed description: see description below)
The range of price movement after breaking out: depends on the height of the head
Sell signal: breaking down the neck line
This formation promises a drop in prices and usually occurs before the reversal of the upward trend. Complete formation occurs after determining four characteristic points (1,2,3 and 4). Points (1) and (3) indicate the formation shoulders (arms), point (2) means head. The last, fourth point is determined after breaking the neck line (marked with a thin blue line). When shaping the head and shoulders, it is very important that the volume behaves in accordance with theory. If we consider the formation as a whole, then the volume should decrease. When determining the characteristic points of the formation, the volume should look as follows:
local maximum during the development of the left arm (1)
lower value when determining the head (2)
increase after the price falls to the neck line
decrease during the creation of the right arm (3)
grows (at least slightly) after breaking the neck line (4).
The possible range of the price movement after breaking the formation (measured from the breaking point – W) should be at least equal to the height of the head above the neck line (violet line).
Note 1: The neck line does not have to be horizontal.
Note 2: There are possible “mutations” of the head and shoulders, eg two heads (then these formations are most often symmetrical).
Below a sample from the real market: