What is the Head and Shoulders reversal pattern?The Head and Shoulders pattern is a trend reversal pattern. Using this technique helps you get into a trade when the stock hits a low. Let me show you an example of this.....
Let us start from the right of the below graph, notice the down trend, the stock continues heading down to around $7,694 than spikes up. This forms the first shoulder in this pattern. The stock then hits a resistance level at $9,000 and then turns down.
The stock continues to head down to $7230, bounces and spikes up. This forms the head. Then it stops at the same level of resistance it did earlier ($9000) and heads down. It stops at $7,500 and heads up. This forms the last shoulder and we would expect a trend reversal after that.
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Some aggressive traders could buy after the bounce off the last shoulder at $7,500. More conservative traders however would wait until the stock goes above $9000 before buying.
If you would have seen this head and shoulders you would have gotten in at the bottom of the last bears market.
Remember to develop a system that fits you and never risk more than 2-5% of your account on any one trade.
 
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