Step 1: Uptrend
The very first part of a pattern is the uptrend. This is the extended move higher that eventually leads to exhaustion.
Step 2: Left shoulder
The market moves down to form a higher low. At this point, things are starting to come together, but we don’t quite have enough to draw the neckline.
Step 3: Head
Now that the left shoulder has formed, the market makes a higher high which forms the head. But despite the rally, buyers are unable to make a substantially higher low.
Step 4: Right shoulder
The right shoulder is where things come together. It’s an indication that buyers are tiring and that the market may be gearing up for a reversal.
As soon as the right shoulder begins, we have enough to start plotting the neckline.
Step 5: Neckline
Now that we have a defined head and two shoulders we can draw neckline support. This level will become a key component when we get into how to trade the breakout.
In addition to the above steps :
- support has been broken
- is below 50
How to trade this pattern :
- Open a position when the price breaks through the neck line
- Place a stop loss order above the right shoulder
- Price target for the formation is equal to the depth of the neck line to the head of the formation
I was too conservative for this trade due to the news.