Head And Shoulder Pattern: How To Identify It On A Crypto Chart?

The head and shoulders pattern is a common and straightforward technical analysis chart pattern that shows a baseline with three peaks, the middle peak being the highest. The head and shoulders chart shows a bullish-to-bearish trend reversal and alerts traders to the impending peak of an ascending trend.

Every kind of trader and investor can use the pattern because it appears on all time frames. The chart pattern provides significant and plainly visible levels, making implementing entry levels, stop levels, and price targets simple.

A head and shoulders pattern can predict a bullish and even a bearish trend reversal. However, an exact inverted head and shoulders pattern suggests the opposite. Although it is regarded as one of the most reliable trend reversal patterns, it has some drawbacks. In this article, we’ll go over the signs of a head-and-shoulders pattern and how to leverage it to reap benefit.

Key Takeaways

The head and shoulders chart pattern has three peaks, with the middle peak being the tallest and the outer two peaks being nearly the same height.

The left and right shoulders are on either ends, and the head is on the middle one.

What is the head and shoulders pattern?

The head and shoulders chart pattern helps traders to spot reversals. It usually occurs after the trend has ended.

The phrase “head and shoulders” refers to a baseline with three tops, the middle of which is higher than the other two and which, in an ideal world, should be parallel to one another. This baseline, known as the neckline, is what causes the bearish signal to appear. Consequently, we can go short if the price drops below it.

Despite the fact that it is an inverse head and shoulders, the bullish setup was incurred. They typically show up in a chart as a baseline with three peaks. This pattern typically manifests at the peak of an uptrend, indicating a turnaround.

It’s crucial to recognize the head and shoulders pattern correctly. If not, you might find yourself going against the overall trend when trading. The pattern includes the following components, as you are already aware:

  • Left shoulder
  • Right shoulder
  • Head
  • The neckline sends a bearish signal

It’s critical to recognize that the neckline might not always be straight. The majority of the time, it will be tilted.

Read more: Rising Wedge Pattern: How To Trade With It on a Crypto Price Chart?

Examples of head and shoulder chart pattern

There are three peaks visible in this graph. In comparison to the other two, the middle peak is higher. The shoulders on the right and left are nearly the same size. In the BTC chart, the head and shoulders pattern first appeared in March 2022 and persisted through May 2022. The pattern’s neckline support is at $47,860. The highest peak formed in the pattern has touched $65,000. The breakout took place immediately after the pattern closed, almost near $46,000.

How to leverage the head and shoulders chart pattern in crypto?

You should wait for the head and shoulders pattern to develop and finish itself before trading. If the pattern is still developing, avoid attempting to predict when the neckline might breakout and refrain from opening any positions before that. The market can quickly change course, leaving you with an open position that is headed in the wrong direction.

Instead, your first course of action should be to wait patiently while keeping an eye on the market. In the interim, you can prepare your trade in advance and be ready to move when the price breaches the neckline.

Check any additional elements that might lead you to reevaluate changing your stop and profit targets. As an illustration, you should begin by examining the prior support levels, which can serve as your price target for the sell order.

Conclusion

In head and shoulder patter, it is essential to manage risk. As a result, a stop loss is placed just above the highest top. Ensure that, the stop-loss order is placed precisely below the lower low when trading the inverse pattern. When the neckline is broken, cautious traders can occasionally exercise patience and wait for prices to retrace above or near the neckline level. However, there is a chance that you will miss the trading opportunity if you wait for a retracement.

Read more: Cup And Handle Pattern: How To Identify And Take Leverage Of It?