Shape A three-trough formation with the center trough below the other
two. It looks like a head-and-shoulders bust flipped upside down.
The three troughs and two minor rises should appear well defined.
Symmetry The left and right shoulders should be opposite one another about
the head, somewhat equidistant in both time and price. There are
wide variations, but the formation is noticeably symmetrical about
Volume Usually highest on the left shoulder or head and diminished on the
Neckline A line that connects the rise between the two shoulders. A neckline pierce signals an upward breakout. For up-sloping necklines, use
the highest high in the pattern as the breakout price.
Upward breakout The breakout is upward, usually on high volume that powers
prices upward. A low volume breakout is not an indicator of an
Compute the formation height by subtracting the value of the
lowest low reached in the head from the neckline, measured
vertically. Add the difference to the point where prices pierce
the neckline. The result is the target price to which prices will
rise, at a minimum. For up-sloping necklines, substitute the
rise between the head and right shoulder (that is, the highest
price in the rise) for the neckline breakout price.
tips for Head and Shoulders Bottoms
Wait for confirmation If you can determine that a head-and-shoulders formation is completing, consider buying the stock. This formation rarely
disappoints and the rise is worth betting on. However, you
must be sure that a head-and-shoulders bottom is present.
Otherwise, wait for price to close above the neckline or highest high.
Stop loss Place a stop-loss order below the lower of the two shoulders.
Often, prices drop to the shoulder lows before meeting
support. Raise the stop as prices climb.
Watch for throwback If you miss the upward breakout, wait. Half the time, the forex will throw back to the neckline. Once it does, buy the forex or add to your position.
Tall or narrow patterns perform better than short or wide ones. Patterns that are both tall and narrow do best