Head and shoulders options
Definition Definition of 'Head and Shoulders' Definition: Head and shoulders is one of the many popular chart patterns widely used by investors and traders to determine market trend. Then the price rises above the previous peak and declines.
And finally, it rises again, but not as high as the second peak and declines from that point. Here the middle peak forms the head and the peaks on either sides create the shoulders.
Volume is a very important factor to look at when one studies this pattern. Head and shoulders options is highest and often expands on the left shoulder as the uptrend continues and more and more investors want to get in, whereas it is lowest on the right shoulder as investors sense a trend reversal.
This low volume is often considered a strong sign of reversal. In the head portion of the pattern, volume lies somewhere between that on the left shoulder and right shoulder.
The head and shoulders pattern has another variation, called head and shoulders inverse, which looks like just the reverse of the head and shoulders pattern.