What is a Head & Shoulders Pattern?
Disclaimer: The posts on HyperLinq blog and associated sites are for educational purposes only to generate discussion. These posts should not be taken as trading advice, nor are they meant to be viewed as trading advice.
Being able to predict the future movement of an asset has always been the goal for crypto traders. Traders know that multiple variables impact the price of a crypto asset, which can be in a good or bad way, for example, partnership signings, hacker attacks, new regulations, etc. Traders combine news variables with trend detection, which helps the trader make a better market predication. Nonetheless, crypto markets are volatile, but skilled traders can occasionally spot distinct movement patterns, permitting them to forecast which way the price will go for that particular crypto asset. So, in this blog, we will explain the fundamentals with three patterns that crypto traders find when trading on various crypto exchanges.
Head and Shoulders
One of the top chart patterns that traders look for is the head and shoulders pattern which is a formation that can seem like a baseline with three peaks. What makes it a head and shoulder pattern is because the middle height is more significant in size than the other two peaks, which tend to be similar in size. The baseline where all three patterns seem to meet is called the neckline. When a trader uses technical analysis, and H&S pattern forecasts a bullish-to-bearish trend setback. It is viewed as one of the most dependable trend reversal patterns that crypto traders use. If spotted correctly, the pattern reveal can detect an uptrend price movement.
Head and shoulders patterns do not have to be symmetrical. Meaning that the left or right shoulders can vary in height, and the neckline might be pointy or skewed. But, the head is always higher than either shoulder, which is the defining characteristic of this pattern. The H&S pattern is reverse forms, demonstrating an approaching alteration in price. The typical H&S pattern is mainly a bearish sign. If a crypto trader points this specific pattern, they can sensibly be sure that prices will drop sometime soon after the right shoulder is formed. When a particular crypto asset, like BTC, starts to generate a standard H&S pattern, the left shoulder of the pattern will be formed by a quick increase in pricing complemented by heavy trading volume. This price surge is brief, but a period of consolidation begins.
Consolidation typically indicates that the crypto asset is trying to sort out the value of, and its eventual course is unclear and moves sideways. Once the consolidation period is over the price of the crypto asset will unexpectedly jump to levels beyond those achieved in the left shoulder. But, trading volume, will remain lower than the left shoulder, which indicates that an H&S pattern is emerging. Once the head’s high is touched, this triggers a burst of selling. Trade volume will increase, and prices will simultaneously decrease to their original level. The new trade volume that the crypto asset experiences after the sell-off briefly will bring the asset price back up before they ultimately settle out, creating the right shoulder.
The Inverse Pattern
An inverse H&S pattern works much the same way. In the inverse pattern, the H&S are distinct by channels instead of peaks, and it usually signifies a bullish indicator, so crypto traders can anticipate that the price will rise for a crypto asset following validation of this pattern. When a neckline forms, a crypto trader inputs an order in to have a long position, this will increase the crypto asset price temporarily before generating the left shoulder. Once the head is formed, trading volume will grow in most cases, similar to a standard H&S pattern. This shows that a crypto asset price is increasing before it goes down to form the right shoulder. When this inverse H&S pattern is established, it signals a setback of the preceding bearish downtrend. Indicating the crypto asset price is about to increase.
The crypto market will always have its unforeseen market conditions. Classifying the trends can be hard work for crypto traders, but patterns like the head and shoulder can help point crypto traders toward a better trade outcome.
Our native desktop app, HyperTrader is in BETA .
Download it today and give it a try. Charting on exchanges is 100% free.