Technical Analysis

Head & Shoulders

1

Another well-known technical indicator is called the ‘head & shoulders’. It has been given that name as the pattern of the stock chart is similar to a head and shoulders – as you can see above.

2

When a head & shoulders pattern forms, it is believed that this means that the trend will reverse. So if the price of a stock was going up before the head & shoulders pattern, it is believed that it will go down.

3

The opposite is called an ‘inverse head & shoulders’, which is basically the same concept but upside down. If the price of a stock was going down before the inverse pattern forms, it suggests that it will go up.

4

As with most technical indicators, head & shoulders patterns are not an exact science and are often wrong. It is primarily used by investors that have a short-term investment horizon, such as day traders.

Test your knowledge...

1. How much can you expect to earn from a cash investment?

Copyright © 2021 Methodology

That's wrong - try again!