Cryptos Land: Crypto Trading - Head and Shoulder Pattern

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Monday, 11 September 2017

Crypto Trading - Head and Shoulder Pattern

What is Head and Shoulder (H&S) and how is it used for trading?

Head and Shoulder is a pattern where the traders can find a neck line, also known as support level to determine the bottom of a stock or crypto. From the name you can guess that this pattern would represent a price trend forming a head along with two shoulders one on left and other on right. So why it is used for?

From Wikipedia
"On the technical analysis chart, the Head and shoulders formation occurs when a market trend is in the process of reversal either from a bullish or bearish trend; a characteristic pattern takes shape and is recognized as reversal formation."

So a H&S pattern is useful in following ways
1- To establish a neck line
2- ToPredict a bullish trend
3- To Predict a bearish trend
4- Place buy orders at the bottom.

There are two types of H&S when which is normal and the other known as inverse or reverse

If you are trading in a coin and see a formation of price candles which is similar to the one as you can see in the image on right then it means that the price of the equity or coin is usually about to fall, in case if the neck line is broken. Once the neck line is broken the price starts to fall and it confirms that a H&S was formed for the coin or stock under consideration. During the down trend it is possible for price to touch the neck line again and afterwards continue the declining trend.
Well, How are they formed?
Left Shoulder : High Volume followed by failing buying pressure
Head : As Coin reaches neck line (bottom) people start to buy the asset under consideration even more to trigger a head because of even higher volume
Right Shoulder : The buying pressure starts to fall as people try to sell their holding and the volume of coin decreases. (Increasing sell pressure at this point)

Inverse or Reverse H&S
This H&S pattern usually means to stash up your bags with the coin or stock under consideration. We came to know earlier that a normal H&S pattern signifies a downtrend, to its opposite an Inverse H&S pattern defines a price breakout. You can see how a price graph of a coin or stock will look like in an inverse H&S pattern in the below picture.
If an inverse H&S has been formed for the coin under consideration expect its price to increase. This is because an inverse H&S usually breaks the neck line also known as resistance level in this case.
Why such pattern is formed?

Left Shoulder : Price starts to increase from the bottom resulting in left shoulder this is because of people thinking that coin has reached bottom and expect its price to increase. However it is market by low volume and less buy support resulting in a new bottom for the coin.
Head : People starts to buy at the new bottom formed for the coin resulting in the price candles closing upwards. This establishes an upward trend marked increased volume. However the price fails to break the neck line (resistance level).
Right Shoulder : Correction appears and volume starts to falls resulting in price downward trend until it reaches the previous support level. This is marked by increasing buying pressure as people flock in to buy the asset under consideration at its support level. Volume increases and the pattern is completed.

H&S is a very useful tool to use if you are a crypto trader. It can help you major bottoms of each coin and its resistance level. You can place buy orders at support level or put a stop loss order  below support level if the price candles have formed H&S pattern. However before using the H&S indicator you should know that H&S might not be perfectly shaped such as one shoulder might be bigger than other and neckline may not straight most of the time.

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