How accurate is the head and shoulders pattern?

    Quick Answer

    The head and shoulders pattern has a 72% accuracy rate, making it one of the most reliable reversal patterns.

    Detailed Explanation

    The head and shoulders pattern is among the most reliable chart patterns with approximately 72% accuracy when properly identified. This reversal pattern signals a shift from bullish to bearish sentiment. The pattern consists of three peaks: a left shoulder, a higher head, and a right shoulder. The neckline connecting the two troughs provides the critical breakout level.

    Key Points

    • 172% accuracy rate for bearish reversals
    • 2Average decline of 20-35% after neckline break
    • 3Volume typically decreases across the three peaks
    • 4Neckline break confirms the pattern
    • 5Target = head height measured from neckline

    Example

    If the head reaches $100, neckline is at $80, the measured move target after breakdown would be $60 (subtracting the $20 head height from neckline).

    Common Mistakes to Avoid

    • ✗Seeing the pattern where it doesn't exist
    • ✗Not waiting for neckline confirmation
    • ✗Ignoring the prior uptrend requirement
    • ✗Setting stops too tight

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