Lesson #49 What are Head and Shoulders? Why Do These Occur? How To Identify Them?

This formation is called so because it looks exactly like the head and shoulders, this is another situation where reversal of trends is about happen after a gradual price hike. Here the base line is created by joining the lowest prices in the graph. This like is considered the very important neckline in this formation.

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As you can see in the above picture, there was a price rise and a fall after reaching a certain level, however there is again another price rise, this was higher than the first one. Again after a brief fall in prices there was another price rise not as high as the previous ones. After this rise, the prices start falling gradually yet smoothly. If you study the graph, it shows you a head and shoulders formation.

Here too, the neckline is quite important. In order to brace yourself against the fall in prices, you will need to put an entry price below the neckline. In order to determine the extent of fall in prices, you will need to calculate the distance from the neckline to the top point in the head graph. You will require to place the same distance below the neckline to determine lowest prices, as shown in picture below.

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As shown above, the fall in prices is as much or more than the distance between neckline and the head.