Head & Shoulder Chart Pattern For Trading
Hi friends, Today we will see Head & Shoulder Chart Pattern For Trading. You can learn simple strategy to earn Income by stock market trading.
Basics of Head & Shoulder Chart Pattern –
This is a reversal chart pattern. This means that the ongoing uptrend in a stock or an index will break and the signals that the downturn is about to start are given after the head and shoulder pattern is formed on the chart. This pattern is genrally find in the shape of both your shoulders and head. This is why it is known as the head and shoulder chart pattern. It consists of three different patterned elements that form a complete head and shoulder chart pattern. The chart on the left is the left shoulder. The part formed by the candlestick in the middle is the head and the part formed by the candlestick on the right is the right shoulder. When you consider all this together. You will see Head and shoulder complete pattern.
Head and shoulder patterns mainly seen in Indices of stock exchanges like NIFTY, SENSEX and some High quality stocks. You can check such patterns on 1 minute, 5 minute and 10 minute time frames for Intra day trade. Consider 15 minute, 30minute, 60 minute time frame for the Buy today sell tomorrow ( BTST ) strategy. Use 1 day, 2days , 5 days time frame for Swing trade and Short term trade. Use 1 month, 2 month, 5month time frame for Medium term trade. For a long term trade timeframe is 1 year, 2 years, 5 years.
How does the head and shoulder chart pattern form on the chart?
When the stock continues to rise, it builds resistance at a level that hinders rising prices. From there, share prices begin to fall. Then prices begin to rise again from a certain level. The level at which prices begin to rise again becomes the first support. After that the prices start going up. This is your left shoulder. Going above the previous resistance, the stock prices start coming down from one resistance again. This chart is consist of heads in patterns. Again they start moving upwards with support around the first support.
Now the right shoulder in the chart pattern is formed. The line that connects the left shoulder support and the right shoulder support is called the neckline. Then the price starts coming down from the place where the left shoulder was resisting or from a slightly lower price. This time the share price breaks the neckline. This is process to form full head shoulder chart pattern. After the neckline break, the stock starts to decline.
Important thing to remember is that you should analyze the volume of trade to get a better idea. Generally volume is high at level Head and level shoulder. Volume is comparatively low around the line joining head and shoulder.
How to sell by using a head and shoulder chart pattern?
After the head and shoulder pattern is formed on the chart, the candle stick should be sold in the next candlestick at the time when the neckline breaks and closes below the neckline. Four patterns are more likely to succeed if the volume increases while breaking the neckline. Avoid selling candle sticks that break the neckline. Subsequent candle sticks confirm the downturn (confirmation candle) and sell at the same time. Use stop loss before placing a trade.
How to set target and stop loss in head and shoulder chart pattern?
To determine target use the highest level (HIGH) of the candle stick that broke the neckline after the sell type of the candlestick after the neckline break. Neckline break should have a stop loss at or slightly above. To set an appropriate target, the distance between the neckline and the head in the chart pattern should be calculated as the distance from the neckline downwards and that is place where the target for this chart pattern is located.
One thing to keep in mind when selling according to the head and shoulder chart pattern is that the risk reward ratio of the place from which you are selling and the target should be right, only then sell otherwise avoid selling. Determine risk reward ratio as per your knowledge and appetite of taking risk.
This chart pattern is forms on top of all the time frames and works properly. You should trade using the time frame according to the type of trading you want to do. Consider pattern appropriate when there are at least seven to eight candle sticks in the head and both shoulders to make the head and shoulder pattern properly. In the head and shoulder chart pattern, the resistance of both the shoulders may be more or less, but the resistance or HIGH of the head should be higher or higher than that of both the shoulders.
Some Tips –
For Intra day trade, There should be at least eight to ten candle sticks in the head and shoulders for Trading.
For Swing trade, There should be a gap of three to five weeks between the head and shoulders for trading
To take Positional Trade or Medium Term type of trading, When the distance between the head and shoulders is three to four months. You will get Good results.
This is how you can use the head and shoulder chart pattern. The above distances are for information only and can vary depending on experience.
Do trading as per knowledge, experience, Risk taking capacity, Risk reward ratio, Technical analysis, Fundamental analysis of stock or indices.
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Author of this article is “Pranav Divekar”.