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Head and Shoulders Bottom

Head and Shoulder Bottom 头肩底

Summary

Head and shoulders bottom is a classical trend reversal pattern, the shape of the pattern is like two inverted shoulders with a head.

Identify

  1. Formation
    The head-and-shoulders bottom appeared at the end of the bear market, reflecting that the market’s trend had turned from a bear market to a bull market, and the pattern was formed by the left shoulder, bottom, right shoulder, and neckline.
    Price began to fall to a certain low and then rebounded to the resistance level to form the neckline, this price pattern will form the left shoulder; the price then falls from the resistance level and exceeded the low of the left shoulder, and rebound back to the neckline to form the head; after the head was completed, it began to fall for the third time and reach the depth of the left shoulder and began to rebound, forming the right shoulder.
  2. Volume
    The left shoulder normally has the highest volume, the head has relatively lower volume, and the right shoulder has the lowest volume. This phenomenon of diminishing trading volume indicates that when the price falls, the bearish momentum becomes weaker and weaker, which indicates the bearish trend is going to end.

    Left shoulder trading volume: The price continued to fall, and the trading volume was greatly increased and then falls back to form the first peak and valley.
    Head trading volume: Traders who missed the decline in the market, tried to sell and pulled down the price, so the price broke through the first peak and hit a new low, but the volume did not continue to increase. The price pulled back again due to profit taking, forming a second peak, the trading volume decreased, and the head pattern is formed. The volume at the lowest point of the head is significantly lower than that of the left shoulder.
  3. Precautions
    1. The neckline does not have to be parallel, it could be downward or upward sloping.
  4. Application
    1. Selling LevelAfter the head and shoulder bottom pattern is formed, it’s a good time to buy after the price breaks through the neckline.
    2. Take Profit Level
      Draw a vertical line from the lowest point of the head to the neckline, and then measure the same length upwards from the neckline. The length measured from the neckline will be the expected range that the price will rise. Traders can take profit within this range.