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What is Head and Shoulders Chart Pattern?

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A lot of the traders like to use this one, but many of them don’t even know why it works and how to utilize it and gain valuable signs that lead to the profit. 

Without going further ado, let us show you an example of head and shoulders.

It comes as a reversal chart pattern.

After an uptrend, if it forms, it has strong bearish sentiment which you have to observe and it shouldn’t be ignored. 

Firstly, we have an uptrend for a certain amount of time.

An uptrend is characteristic  by creating higher highs and higher lows.

After going up for some time, it hit the first level of resistance and forms a left shoulder.

At that moment, it is hard to even think about the potential head and shoulders.

Every uptrend has ups and downs within itself, so this decline in the price is nothing to worry about.

Once sellers are out, it starts rallying out making new higher high.

At that moment it is still strong uptrend without any signs of slowing down.

Then, once the head is formed, price start declining again but this time much more than the first time.

It retraced all the way down to the area of the early low (neckline area).

At that moment you shouldn’t automatically think of head and shoulders since it is still too far from this pattern.

What is important here is the fact that the uptrend is in danger because it didn’t create a new higher low.

This is the first clear sign of the weakness in the market you should observe. 

After the second low is reached, it starts gaining upward momentum but not for too much.

In the area around the left shoulder, it forms the right shoulder and starts declining again.

After creating this shoulder, it becomes clear that the buyers are having a big problem.

Not only that they didn’t form higher low, but this time they formed lower high.

The creation of a lower high express the weakness of the trend.