When time comes to find a trading strategy for the stock market, many beginner investors consider the head and shoulders pattern. In this article, we will explore the basic concept of the head and shoulders pattern, how a new trader can use this to improve their overall trading strategy and performance, as well as relevant strategies to compare against.
The head and shoulders pattern is an analysis of price movements in the stock market and it is typically identified as a chart pattern when observing price action. It is created by a series of highs and lows, where typically a higher high is followed by a lower low, then a higher high again, and finally, a lower low below the initial low. The pattern typically looks like the contours of a head with two shoulders.
When attempting to identify the head and shoulders pattern, traders must compare the highs and lows. The upper peak is understood as the head and the two lower points on both sides of the peak as the two shoulders. Generally, the two shoulders are of equal height or nearly equal to each other, but this is not always a definite criterion since other factors come into play.
From the head and shoulders pattern, investors can characterize the overall trend of a stock. When the shoulders of this pattern begin to break in the opposite direction of the overall trend, it typically signals the end of the current trend and the potential for a new trend to begin. That trend is usually the same direction as the break in the shoulders.
For a novice trader, using the head and shoulders pattern for proper guidance can potentially lead to more success. By recognizing the pattern, the trader can identify when a reversal could be occurring and then adjust their position accordingly. Before acting on this information, though, the trader should look to the surrounding charts to get an idea of the future direction that the stock is going.
One strategy to use in conjunction with the head and shoulders pattern is the short-term trading. By short-term trading, an investor looks to purchase or sell stocks with a short-term objective of making quick gains with an exit strategy as soon as the ideal profit is made. The ability to quickly capitalize on good trading opportunities is what makes this strategy effective.
A second strategy to compare against is the long-term trading. Long-term trading involves investing for the long haul, taking the time to research and develop a strategy to make consistent profits. With this strategy, investors are looking for advancements in the stock, technological developments, or macroeconomic changes to create potential upsides.
An individual’s success with investing is determined by the strategies they employ and the dedication they bring. By taking the time to become familiar with the head and shoulders pattern and applying it to short-term and long-term trading strategies, a beginner investor can make significant gains in the stock market. There are, of course, risks to consider, and investors should not invest beyond their means. But with the right commitment to learning and caution, the head and shoulders pattern can become an effective tool for any new trader.