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Investor: Identifying Head & Shoulder Chart Pattern

Investors around the world have heard of the famous head and shoulder chart pattern. However, most do not know how to properly identify it. In this article, I will lay out all the major keys to finding and acting upon a proper head and shoulder chart pattern. By learning these rules and properly identifying a head and shoulder pattern, investors can increase their profits exponentially. For investors and stock market traders who are not aware, head and shoulder chart patterns are very bearish signals. If/when they appear, investors should be on high alert to exit a long or even potentially short the pattern when triggered. The the key rules below…

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Rule #1

The head and shoulder chart pattern should resemble an actual human. What does this mean? It means it should generally be normal looking. The weird/lopsided it is, the less trustworthy it is. There should be two very defined shoulders on either side of a head.

Rule #2

The high of the head must always be the highest point. No shoulder can breach the high of the head and keep the pattern valid. If ever a pattern you are watching has a shoulder go above the head, investors can throw it away and stop watching it. It is no longer valid.

Rule #3

Investors and stock traders must always find the neck line. To find the neck line, connect the bottom of the interior pivot of each shoulder and draw a trend line.

Rule #4

For a neck line to be valid, it must be horizontal or inclined. A declining neck line is invalid and will signal no true head and shoulder pattern to investors and stock traders.

Rule #5

For a head and shoulder to trigger, price must trade below the neck line. Once it trades below the neck line, price has broken and should see significant downside. This is where investors and traders would short the stock, market, ETF, commodity, currency…ect.

Learning these head and shoulder rules will increase your ability to profit. Patience and discipline are key to waiting for the proper pattern to form with all the criteria listed above. If you do find it and patiently wait for the trigger, your success rate will be easily north of 80%. Most investors and stock traders do not have the patience to wait and pull the trigger only when appropriate. Thank you for reading and learning.