HEAD AND SHOULDERS

A head and shoulders pattern is one of the most famous technical analysis patterns. Traders are particularly fond of it because it not only indicates a change in price direction, but can offer specific price targets for those familiar with its use. Binary option traders who enjoy employing the above/below type of options would do well to familiarize themselves with the head and shoulders pattern.

To identify a head and shoulders pattern on a price chart, traders look for what appears to be the silhouette of the head and shoulders of a person. A proper head and shoulders usually occurs in the context of an uptrend, and is characterized by three price waves. The first is a small-sized ‘shoulder’ wave, and it is followed immediately by the larger ‘head’ wave. The ‘head’ wave is in turn followed by another ‘shoulder’ wave identical in size to the first. The ideal head and shoulders is a horizontal pattern with the lowest points of the shoulders and head aligning perfectly.

At the end of the second shoulder, when the price of the asset lines up with the base of the ‘neck’ below the head, a trader should be ready to go short and do so as soon as price breaks below that neckline. The move down in price after a head and shoulders is said to be a measured move because it will fall a distance equal to the distance between the top of the ‘head’ and the base of the ‘neck’. This is invaluable information that binary option traders can use to incorporate into their above/below or one-touch option trading.

Reverse head and shoulders occur as well. These happen in the context of downtrends and look like the mirror images of standard head and shoulders patterns. All of the same principals apply.