Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

TheNegotiator

The Classic 'head and Shoulders' Pattern

Recommended Posts

So how useful is the head and shoulders pattern today? I think most people would say that it's pretty useful. But why? How many of us stop to question the nature of this old chart pattern? Let's take a look at the nature of it and discuss the reasons for it's efficacy.

Share this post


Link to post
Share on other sites

So a head and shoulders pattern, or inverse of the same pattern, is simply put a trend followed by a pullback, then a further push and another pullback and finally a last attempt to continue the trend which lacks in strength. So basically the last push higher(or lower) makes a lower high(or higher low) than the second swing and indicates exhaustion in the trend. A 'trend' or 'neckline' is drawn between the pullback lows(or highs) to indicate a potential entry once the pattern completes.

HandS.thumb.JPG.c90c673169e0e94e3d10923b2f7b8108.JPG

Share this post


Link to post
Share on other sites

So what are the implications of the supply and demand in this pattern? Well, the trend starts and continues with the left shoulder, pullback and then head. The buyers in the above image of gold try to push the price higher but either are met with stronger selling (new or old business) or lack of continued strength. This is clearly demonstrated by the lack of a continuing trend which would have been indicated by a higher high. The last piece is the neckline break. The pullback trend is broken indicating a capitulation of longs. Generally I would look for this pattern on a 30 min timeframe or more as I see it as having momentum implications.

Share this post


Link to post
Share on other sites
So a head and shoulders pattern, or inverse of the same pattern, is simply put a trend followed by a pullback, then a further push and another pullback and finally a last attempt to continue the trend which lacks in strength. So basically the last push higher(or lower) makes a lower high(or higher low) than the second swing and indicates exhaustion in the trend. A 'trend' or 'neckline' is drawn between the pullback lows(or highs) to indicate a potential entry once the pattern completes.

 

24451d1304461853-classic-head-shoulders-pattern-hands.jpg

 

if you add volume to the chart,

you might see an even better picture.

if you don't have volume,

stochastics is a good supplement.

Share this post


Link to post
Share on other sites

Volume of course can 'complete' the story somewhat. For example, what would be your view on a break of the neckline if you then saw that there was no follow through selling appearing in the volume? Would you still be wanting to sell hard into the break or would it be more prudent to wait for an attempted retest and fail of the neckline? Coupling it with delta is another way to go. Stochastics is another possibility I guess but you should already be seeing price divergence on the right shoulder, no? Would you use stochastics in another way Tams?

Share this post


Link to post
Share on other sites
Volume of course can 'complete' the story somewhat. For example, what would be your view on a break of the neckline if you then saw that there was no follow through selling appearing in the volume? Would you still be wanting to sell hard into the break or would it be more prudent to wait for an attempted retest and fail of the neckline? Coupling it with delta is another way to go. Stochastics is another possibility I guess but you should already be seeing price divergence on the right shoulder, no? Would you use stochastics in another way Tams?

 

you will see the volume behavior at trend reversal

 

11927d1246813024-price-volume-relationship-b2b.jpg

 

more details here...

http://www.traderslaboratory.com/forums/f34/price-volume-relationship-6320.html

Share this post


Link to post
Share on other sites

J.M. Hurst has one of the best 'explanations' of the pattern I have ever seen / used.

 

re: "So how useful is the head and shoulders pattern today?"

And in that context, it's as useful as it ever was.

ie It 'succeeds' as much as it ever did... and it 'fails' as much as it ever did...

Share this post


Link to post
Share on other sites

Read "Evidence Based Technical Analysis" pages 151 - 161 concerning the Head and Shoulders pattern for an objective science based answer to the question of it's predictive abilities. A study based on 31 years worth of market data and over 3000 examples of the pattern proved it had no predictive ability whatsoever.

Share this post


Link to post
Share on other sites
Read "Evidence Based Technical Analysis" pages 151 - 161 concerning the Head and Shoulders pattern for an objective science based answer to the question of it's predictive abilities. A study based on 31 years worth of market data and over 3000 examples of the pattern proved it had no predictive ability whatsoever.

 

i read that book and enjoyed it - I think it more confirmed what i thought early on, as i was constantly told tech analysis does not work....

however - it also did help form my opinion of the importance of context and then once in the trade the importance of trade management.

Nothing works all the time, but it can still help with indications of what might happen.

Personally - HSH, wedges, flags etc - are all formed from abc patterns - apply some context, apply some simple trend analysis, and they offer good low risk areas for entry and trade management.

Share this post


Link to post
Share on other sites

That's an interesting study clmacdougall, however I would seriously question the reliability of such a claim. What were the parameters? Which timeframes were used? How were trades managed? In any form of statistical analysis, inaccurate conclusions can be drawn either by intention or by using flawed methods. Not to say this is the case in the study you mention, but I would certainly have to analyse it myself to some degree to have an idea of how good the study is. Just because it is in a book doesn't make it right.

Share this post


Link to post
Share on other sites

If you can find the book you'd appreciate the amount of work put into the study. Every variable of the H&S pattern is analyzed and scrutinized in order to remove personal subjectivity from the equation and to objectively define the pattern and test it's predictability. It showed only modest results in 2 of 6 currencies and was disastrous when applied to over 100 randomly selected equities.

The first study was performed by Kevin Chang and Carol Osler it was later confirmed by Lo et al. They further said Bulkowski's study was worthless because it failed to objectively define the H&S pattern and wandered off into the pseudo science of subjective TA.

Share this post


Link to post
Share on other sites

According to me the Head and Shoulders Pattern is the stock price is trying break 3rd time above or below which is called neckline, (The best known of all the reversal patterns, The most powerful of all reversal patterns), i am using the same pattern in my technical analysis to provide NSE India Intraday Stock Trading Tips to my clients, I am just leaving a Call for tomorrow (Monday) market -23-01-2012.

 

BHARATFORG which perfectly fits into Inverse Head & Shoulders' Pattern in 10min and 15min Chart and it says neckline Bar high value @ 285.1, so BHARATFORG buy above 285.1, Target upto 292 Stoploss upto 279.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • NFLX Netflix stock, with a solid top of range breakout, from Stocks to Watch at https://stockconsultant.com/?NFLX  
    • NFLX Netflix stock, with a solid top of range breakout, from Stocks to Watch at https://stockconsultant.com/?NFLX  
    • It depends. If you have lots of money that you can buy a house without a loan and if you don't have any parents to sponsor then it is a good idea. Otherwise it might be a bad idea depending where in Canada you are heading to. I earned a good middle income in my home country and I migrated to Vancouver 5 years ago at the age of 35. I had to start right from the bottom, lowest of the low.. Now i am finally earning a middle income in Canada but I still cannot afford to buy a one bedroom apartment. Having left behind friends, family and home, most of the times I think it is not worth it.   In short, do not migrate if you already have a good life in your home country and you are happy. Only migrate to Canada if you really have to leave your home country say there is a war or something really bad. Discrimination still exists here and its really tough for newcomers unless you are super rich. Good luck. David Chong, Quora  
    • This is bigger than the internet. Bigger than mobile. Bigger than social media.   While everyone was distracted by stock market fluctuations and political theater…   Most people have NO IDEA what just happened last week with ChatGPT.   Their new memory feature allows ChatGPT to remember EVERYTHING about you across all your conversations.   Think about that for a minute...   While most tech companies have been collecting mere breadcrumbs about you - your likes, your clicks, your browsing history - OpenAI is now collecting the most valuable dataset in human history: your complete psychological profile.   This is Zuckerberg x 5,000.   The more you use ChatGPT, the more it understands you, becoming a supercharged reflection of yourself that improves at an exponential rate.   Are you a regular ChatGPT user?   Consider whether it’s time to turn off the “you can train on my information” feature. To prevent your data from being used for training while still using the memory feature:   Disable Model Training: Navigate to Settings > Data Controls. Toggle off "Improve the model for everyone". Manage Memory Settings: Go to Settings > Personalization > Memory. Here, you can: Turn off memory entirely. Delete specific memories. Use Temporary Chat for sessions that won't be saved or used for training. Now the investment implications…   Why This is Bigger Than You Think Consider this: the relationship between humans and ChatGPT is evolving beyond a mere tool.   People are now treating these AI assistants as friends, confidants, and even romantic partners.   I'm not making this up - there are already documented cases of people ending real human relationships to pursue “connections” with their AI companions.   A viral Instagram meme shows a person going through life with a glowing, featureless humanoid figure - representing ChatGPT - as their companion.   The post has over 1.1 million likes and comments like "Bro ChatGPT is like my best friend. Ain't even ashamed to say it" with 25,000 likes.   But here's where things get really interesting for investors and entrepreneurs...   Three Things to Watch For starters, hardware is the next big thing for the big players.   The iPhone form factor is dead.   It hasn't meaningfully changed in nearly a decade. The next evolution in hardware will be designed specifically to interface with these AI companions.   OpenAI is already working on hardware with Johnny Ive, the legendary designer behind the iPhone and iPod. But you can’t ignore Elon Musk’s edge here.   So what does all of this mean for you?   The companies that control the personal AI relationships will be worth trillions. OpenAI and Elon Musk will have the coziest moats. We're witnessing the birth of a new internet - one built on agents that can communicate with each other across platforms. Google's new agent-to-agent protocol allows AI agents to work together without sharing internal memories or tools. The hardware companies that create the perfect interface for these AI companions will dominate the next decade of technology. And almost nobody is talking about what this means.   My prediction? Within five years, most people will have a personal AI that knows them better than anyone else. And they will interact with it in ways that seem foreign today.   (And, yes, it will almost certainly have dystopian elements.)   In the meantime, the biggest gains won’t come from household names. And, right now, James is seeing a prime opportunity to invest in the most under-the-radar plays in AI…   For dirt cheap. By Chris C. Source: https://altucherconfidential.com/posts/use-chatgpt-protect-yourself-now
    • KBH KB Home stock, nice day and rally off the 50.82 support area, from Stocks to Watch at https://stockconsultant.com/?KBH      
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.