The Head and Shoulders Top marks a "reversal" pattern in an uptrend market and is extremely popular among currency traders.
The pattern consists of 2 Shoulders, 1 Head and the Neckline (support):
1) The first point - the left shoulder - occurs as the price of the currency pair in a rising market hits a high and then fall back to the neckline.
2) The second point - the head - happens when prices rise to an even higher high and then fall back again to the neckline.
3) The third point - the right shoulder - occurs when prices rise again but don't hit the high of the head.
4) A key element of the pattern is the neckline and can be horizontal, slope up or slope down and is formed by drawing a line connecting two low price points of the formation.
What does a Head & Shoulders Top reversal pattern look like?
The pattern is complete when support provided by the neckline is "broken." This occurs when the price of the currency pair, falling from the high point of the right shoulder, moves BELOW the neckline.
Currency analysts will often say that the Head & Shoulders top pattern is not confirmed until the currency price closes below the support neckline - it is not enough for it to trade below the support neckline.
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