Head and Shoulders Patterns

Larry Pesavento: ‘Head and Shoulders patterns are one of the most reliable patterns in technical analysis. The key to making a perfect head and shoulders pattern lies in the time between the head and the left and right shoulders. In other words, the ideal situation for the technician is when the time between the left shoulder to the head and the head to the right shoulder are equal which makes a perfectly symmetrical head and shoulders pattern. The calculation is simple because all you have to do is to count the number of bars from the left shoulder to the high and from the high to the right shoulder. Also look for a Fibonacci relationship between the head and the shoulders. The expansion of the left shoulder to the high will usually be 1.27 or 1.618. The contraction from the high to the right shoulder will usually be 0.618 or 0.786.  When these ratios come together exactly at the time when the symmetry is showing, the pattern is one of the best trades a technician can get, i.e. low risk with high profit potential.’

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