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Head & Shoulders Formations - Technical Analysis

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This formation can appear anywhere in the chart and is made up of the Head, Left Shoulder, and Right Shoulder. There are both top and bottom formations. 

Head & Shoulders Top FormationHead & Shoulders Top Formation
In this formation, the middle peak, the Head (H), is higher than either shoulder (LS, RS). This formation anticipates a drop in price below the Neckline (shown by the red arrow).

To trade a Head & Shoulders top formation, place a sell order on the break of the Neckline. Your stop loss order should then be placed just above the Head. The stop loss order can also be placed above the Right Shoulder as a more conservative point. 

 

Head & Shoulders Bottom FormationHead & Shoulders Bottom Formation
This formation is an inverted version of the Head & Shoulders top formation. A Head & Shoulders bottom anticipates a rise in price above the Neckline.

To trade a Head & Shoulders bottom formation, place a buy order on the break up from the Neckline. Then place a stop loss order just below the Head. The stop loss order can also be placed below the Right Shoulder as a more conservative point.