Confused about how to determine when we should buy or sell? Want to know when the uptrend of stock/crypto prices starts to end and turns down? Don’t want to miss the start of the price rally going up after a long fall? Want to know when big money accumulates and distributes?
If the swing trader recognizes the up and down reversal signs by using candlesticks, then the super trader / trend follower recognizes the reversal signs by using the reversal pattern chart. One of them is Head and Shoulders and Inverse Head and Shoulders.
Even by recognizing this pattern, we can know when big money is buying and selling (accumulation), and when they start throwing things away (distribution).
The head and shoulders itself has a shape with three mounds, where the mound in the middle will be larger than the other two mounds on the sides.
Head and Shoulders (HnS) is one of the chart patterns that really helps us in seeing the reversal of stock prices from rising to falling.
Illustration of a head and shoulders (HnS) pattern.
Meanwhile, Inverse Head and Shoulders (iHnS) helps us to see a reversal in the direction of stock prices from down to up join automate trading.
Illustration of an inverse head and shoulders (iHnS) pattern.
Thomas N. Bulkowski, author of the book Encyclopedia of Chart Patterns, said that this pattern is an average of 60% successful in achieving its target.
The data is obtained from a total of about 6000 trades in a market that is trending up on a high timeframe (bullish market). Actually, in the book written by Thomas, there is much more complete data. One of them includes data when the trend is down on a high timeframe (bearish market). But broadly speaking, whether it’s an up or down trend, data from Thomas states that the average success rate is 60%.
How accurate is it in Indonesian stocks and cryptocurrencies?
Head and Shoulders
If it appears above, the head and shoulder (HnS) pattern is a sign of a bearish reversal, aka a sign that the uptrend will turn down.
Draw a head and shoulders pattern, the reversal of an uptrend to a downtrend.
In Indonesian stocks, this HnS pattern often appears in large cap stocks. Likewise in Cryptocurrencies, and in stocks on other exchanges for example in the US market.
Why is that?
This is because in large-cap and highly liquid stocks, large investors own so many shares that when big money wants to take profit, they have to sell gradually and cannot run out once.
When big investors start distribution/selling, the price will drop by big volume. Big money will stop selling. At the same time, few retail investors buy the stock because they want short-term profits, and the price will rise but with little volume. It’s also possible for big money to mark up, buy a little so that the price goes up, then sell again in large volume. Who knows?
When this happens repeatedly, the price chart will form several highs, forming a bearish reversal pattern, one of which is the HnS pattern.
Inverse Head and Shoulders
On the other hand, if it appears below, then this pattern is a sign of a bullish reversal from a downtrend to an uptrend, and is called an Inverse Head and Shoulders pattern.
Draw an inverse head and shoulders pattern, the reversal of a downtrend to an uptrend.
Similarly, when smart money starts to accumulate / buy, the price will rise with a large volume. At the same time, retail investors start selling / profit taking when the price rises a little, then the price will decrease with a small volume. That’s where smart money buys back and prices go up again with large volumes.
This happened several times, thus forming a bullish reversal pattern, one of which is the Inverse HnS pattern.
The important things to note when we look at the Head and Shoulders pattern are:
Trading Volume
The HnS pattern becomes more accurate when it is accompanied by a spike in volume up when the price goes down, and also when the volume goes down when the price goes up. This confirms the distribution activity of smart money, which indicates that selling pressure is greater than purchasing power.
Volume will usually jump very high when a breakdown occurs, ending a sideways trend & distribution period, starting a down / bear trend …