Here's One Chart Formation You Can Rely On

Posted on by The INO.com Team

Head and Shoulders Formations ... it's not a shampoo

One of the oldest and most reliable of all chart formations is the Head and Shoulders Formation. This formation takes place usually after a trend has been established and in place for some time. It can in rarer instances take place in a continuation pattern and still be effective. The two formations we are going to look at today are a Head and Shoulders Top (HAST) and a Head and Shoulders Base (HASB). Both of these formations have a high degree of accuracy and usually portend a major change in direction for a market.

A normal Head and Shoulders Top (HAST) or Head and Shoulders Base (HASB) has a right shoulder, a head, a left shoulder, and a neckline. More complicated formations have double heads or double shoulders and, in some rare instances, triple shoulders. Both a Head and Shoulders Top (HAST) and a Head and Shoulders Base (HASB) have a neckline, and a Head and Shoulders formation should only be considered completed when the neckline is broken.

Once the neckline is broken, it is possible that prices can set back and retest the neckline. It is perfectly normal and healthy for a market to do this. Care must be taken that the retest of the neckline does not exceed by too much the original neckline and thereby abort the formation.

As a general rule, if the market sets back through its neckline and violates the left shoulder formation, it should be viewed as invalidating the original buy or sell signal. In order to predict the extent of a move a measurement is taken from the top part of the head to the neckline. The Head and Shoulders Target Zone (HATSZ) is created when you add or subtract this distance from the neckline, depending on whether it’s a Head and Shoulders Top (HAST) or a Head and Shoulders Base (HASB).

See how many chart formations show up in MarketClub. This type of formation occurs in stocks, futures, forex, metals and mutual fund markets.

Every Success,

Adam Hewison

President, INO.com
Co-creator, MarketClub

16 thoughts on “Here's One Chart Formation You Can Rely On”

    1. Pratty,

      Not sure what happened to my earlier reply. But to answer your question MarketClub scans for many different criteria but does not scan for specific chart formations. This may be something that we address in the future.

      Thank you for your feedback and comments.
      Adam

    1. Hi Adam,
      After my question I could not find a reply that answered my question. Infact I checked all your replies for this blog and couldn't find the answer.

  3. Dick,

    Thank you for your feedback. The head and shoulders pattern is one of the most reliable patterns in technical analysis. That is not to say it is 100% correct, nothing is ever 100% correct in the market. However, I think it is safe to say it's probably 70-75% correct overall.

    All the best,
    Adam

    1. Any scans available in Marketclub to find such formations? Asking again as no one replied.

  4. Hi Adam;

    For every Head and Shoulder pattern that comes true, I can show 33 that don't.

    1. Kunga,

      As a general rule the volume on the right shoulder should be less than the left shoulder. When the price action moves above the neckline that is when you want to see some spike in volume.

      Hope this helps.

      All the best,
      Adam

  7. thanks adam,
    but I did not understand one thing u said
    "if the market sets back through its neckline and violates the left shoulder formation, it should be viewed as invalidating the original buy or sell signal"
    in this chart the right side of neckline is almost already under the left shoulder or touching it.
    thanks

    1. Yosry,

      If the market falls back below the neckline and closes below the area it
      is normally not a good indicator that you have completed a head and shoulders base. It could mean that this market was a fake out and that it needs more work.

      I hope this helps you understand.

      All the best,
      Adam

  8. Hi Adam

    Would appreciate your opinion... Could you say that the EURUSD has carved out a head and shoulders pattern now? And what would be the right trade if the Euro falls below 1.2511?

    I know that no one can predict what happens... but I do value your opinions, and will certainly appreacite a response.

    Regards

    John

  9. You said the same thing about ABX....what happened to this so called reliable formation?

    1. Martin,

      Thank you for your feedback. We say something is reliable in the markets does not mean it is 100% correct. This was the case with ABX who had the perfect technical setup it just did not follow through to the upside. One problem a trader may have is when he or she starts second-guessing formations and choosing which ones to take, or not take.

      For myself I would rather take a position in a highly reliable technical set up than not take it. The worst thing in the world is being right in the market but not having a position. I know from practical experience years ago that this is a case.

      All the best,
      Adam

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