The head and shoulders pattern is a popular chart pattern used by traders to identify potential trend reversals in the market. It consists of three peaks, with the middle peak (the “head”) being the highest, and the two outer peaks (the “shoulders”) being slightly lower in height. The pattern looks like a person’s head and shoulders, hence the name.
When this pattern appears in a cryptocurrency chart, it often indicates that the current uptrend is losing momentum and a downtrend may be on the horizon. The left shoulder is formed when the price reaches a new high, followed by a small dip before it rises again to form the head. The right shoulder is then formed when the price rises again, but fails to reach the height of the head, followed by a dip.
Traders look for a break below the neckline, which is the support level that connects the lows of the left and right shoulders. This is seen as a confirmation that the pattern has been completed and the trend is now reversing. The target for the reversal is often calculated by measuring the distance from the head to the neckline and projecting it downwards from the neckline.
It’s important to note that while the head and shoulders pattern can be a reliable indicator of a trend reversal, it’s not 100% guaranteed. Sometimes the pattern can fail, and the price may continue to rise instead of reversing. As with any technical analysis tool, it’s important to use the head and shoulders pattern in conjunction with other indicators and analysis techniques to make informed trading decisions.