[candlesticks] The Classic 'head and Shoulders' Pattern

[TheNegotiator 13]

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.

[TheNegotiator 13]

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.

[TheNegotiator 13]

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.

[Tams 20]

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.

 

 

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.

[TheNegotiator 13]

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?

[Tams 20]

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

 

 

more details here...

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

[zdo 20]

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...

[TheNegotiator 13]

A nice example of a potential H&S pattern today in the ES and how jumping the gun is not advisable!

[clmacdougall 11]

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.

[SIUYA 11]

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.

[TheNegotiator 13]

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.

[clmacdougall 11]

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.

[TheNegotiator 13]

For me, the key is not to LOOK for these patterns. But if you know them and they pop up clearly, they can work very well.

[Stock Research 10]

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.