Head and Shoulders is a popular chart pattern that is used in technical analysis to identify potential reversal patterns in the market. The pattern forms when the price of an asset creates three peaks, with the middle peak (the head) being the highest and the two other peaks (the shoulders) being lower in height and relatively similar in height to each other. The pattern is considered complete when the price breaks below the "neckline" which is a line connecting the lows of the two troughs between the head and the shoulders.
The head and shoulders pattern is a bearish reversal pattern, meaning that it often occurs at the end of an uptrend and signals a potential change in trend from bullish to bearish. The pattern indicates that the buyers are losing momentum and the sellers are gaining control of the market.
Traders typically enter a short position after the price breaks below the neckline, with a stop-loss order placed above the neckline. The profit target is usually set at the same distance as the height of the pattern, measured from the neckline to the highest point of the head. It's important to note that while head and shoulders patterns can be a powerful reversal signal, they are not always accurate, and traders should always use other forms of technical analysis to confirm their trades.
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