Head and Shoulders

The Head and Shoulders pattern is a bearish reversal pattern that typically forms after an uptrend. It consists of three peaks with the middle peak (the head) being the highest and the two other peaks (the shoulders) being slightly lower. The line connecting the two troughs between these peaks is called the "neckline". The pattern is confirmed when the price falls below the neckline following the formation of the second shoulder. This pattern suggests that the security's price is set to fall, and the distance it may fall is generally considered to be equal to the height from the neckline to the top of the head.

Inverse Head and Shoulders

The Inverse Head and Shoulders pattern is just the opposite of the Head and Shoulders pattern and acts as a bullish reversal pattern. It forms after a downtrend and consists of three troughs, with the middle one (the head) being the deepest and the other two (the shoulders) being less deep. The pattern is confirmed when the price rises above the neckline (the line connecting the peaks between these troughs) after the formation of the second shoulder. This suggests that the price of the security is set to rise, and the distance it may rise is generally considered to be equal to the height from the neckline to the bottom of the head.

In both patterns, volume plays a crucial role. In the Head and Shoulders pattern, volume typically declines from the left shoulder to the head and increases on the decline from the head and the formation of the right shoulder. In the Inverse Head and Shoulders pattern, volume usually increases on the rise from the head and the formation of the right shoulder.