Head and Shoulders Pattern

In investment charting, the term “head and shoulders pattern” refers to a pattern in a chart which indicates trend-reversal patterns. A head and shoulders pattern is made up of three ascending tops, with the second (middle) ascending top being higher than both the first and the third.

Example: A stock's price climbs to 200 Swiss francs before descending to 198 francs. It then climbs to 202 francs before falling to 199 francs. It then climbs to 200 francs again before and then begins to decline again.

If these price changes were depicted as a pattern, the second ascending top would appear taller while the lower first and the third tops would flank the second, hence the term “head and shoulders”.

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