Gate.io AMA : Reversal K-line Pattern - Head and Shoulders Bottom

Today let's study more about Reversal Technical Pattern - Head and Shoulders Bottom

Definition:
The Head and Shoulders Bottom refers to the formation of three distinct points that are slightly lower than the two sides after the price falls sharply. The three points are called left shoulder, head, and right shoulder from left to right.
In terms of volume, the Head and Shoulders Bottom is more complicated than the Head and Shoulders Bottom Top, especially when it bounces up from the right shoulder and breaks the neckline.
Unlike the Head and Shoulders Top, breaking the neckline usually requires significantly amplified volume to confirm, otherwise the validity of the Head and Shoulders Bottom pattern is questioned, because the market is likely to come out of a failed Head and Shoulders Bottom trend.
As shown in the following picture :

The technical characteristics of the Head and Shoulders Bottom
1) Appeared in a relatively sharp downward trend, with a deep decline in the previous period
2) At the end of the decline, the price bottomed out three times, forming three troughs. The lows of the left and right troughs are basically at the same level, called the left shoulder and the right shoulder; the trough in the middle is significantly lower than the left and right shoulders, called the head
3) The high points of the left shoulder and the head are basically the same, and the two high points are connected by a straight line, which is the neckline. If the last rise effectively breaks through the neckline, the Head and Shoulders Bottom will be established. The criterion for an effective breakthrough is that the closing price breaks through the neckline by more than 3%.
4) Under normal circumstances, the trading volume does not change much during the formation of the Head and Shoulders Bottom, and is basically in a state of extreme shrinkage. However, when the neckline is broken upwards, the volume must increase significantly, otherwise the effectiveness of the breakout is questionable.
The bottom of the Head and Shoulders Bottom and the top of the Head and Shoulders Bottom are exactly the same shape, the difference is that the direction is opposite. The bottom of the Head and Shoulders Bottom is the reversal of the top of the Head and Shoulders Bottom, so it is also called the inverted Head and Shoulders Bottom. The symmetry of the Head and Shoulders Bottom Top and the bottom of the Head and Shoulders Bottom is another manifestation of the third largest assumption of the three major assumptions in technical analysis, "History will repeat itself".
Like the Head and Shoulders Bottom Top, the Head and Shoulders Bottom perfectly illustrates the Dow Theory's definition of bull and bear markets and the process of trend reversals. The Head and Shoulders Bottom is between the formation of the head, the price trend is that the back high is lower than the previous high, and the back low is lower than the previous low; The high is also higher than the previous high, thus confirming the long-term trend from bears to bulls.
The technical meaning of the Head and Shoulders Bottom
After the price breaks above the neckline, the trend will turn from falling to rising, which is a buy signal.
A valid breakout of the Head and Shoulders Bottom is an entry point for trend technical traders.

Example of BTC real order

In the Mar.1st BTC market, the price fell from $58,000 to $43,000 after a week, a drop of 24%. Then, a compound Head and Shoulders Bottom was formed at the bottom. After the right shoulder broke through the neckline, it stepped back several times without breaking the neckline, and finally pulled up strongly, rising from $47,000 to $62,000, with a cumulative increase of 27%.

Special note
Technical form
1) The shape of the Head and Shoulders Bottom and the top of the Head and Shoulders Bottom are the same, the direction is opposite, and the technical meaning is also the same. Most of them are the reversal patterns of a long-term trend, but the direction of the reversed trend is opposite.
2) When the price breaks through the neckline of the Head and Shoulders Bottom, it is a buy signal. Although the price has risen by a certain extent compared with the lowest point, the rise is a high probability event, and traders can enter the market boldly.
3) The right shoulder of the Head and Shoulders Bottom is higher than the head, indicating that the low point of the price is no longer lower than the previous low point, indicating that the bull market is coming.
4) When the price breaks through the neckline of the Head and Shoulders Bottom, it indicates that the high point is higher than the previous high, confirming that the bull market is coming.
5) The longer it takes to form the Head and Shoulders Bottom, the greater the possibility of rising after the market breaks through the neckline, and the stronger the rise will be.
6) The completion of the Head and Shoulders Bottom is subject to the effective breakthrough of the neckline, which is also the entry standard for traders to buy long. After breaking through the neckline, the price may fall back to the neckline, confirming the validity of the breakthrough for the second time. A retest without breaking the neckline is an excellent second buy point for traders. But if it falls below the neckline again, then leave the market.
In terms of transaction volume
The volume of the Head and Shoulders Bottom is more complex and changeable than that of the Head and Shoulders Bottom Top, and there is almost no regularity. The most critical criterion is the price.
Composite Head and Shoulders Bottom pattern
The compound Head and Shoulders Bottom pattern includes two types of technical graphics: compound Head and Shoulders Bottom Top and compound Head and Shoulders Bottom, mainly referring to the Head and Shoulders Bottom Top and bottom of the long Head and Shoulders Bottom. For example, the bottom of the Head and Shoulders Bottom of the double head, the double left shoulder, and the double right shoulder.

As shown below:
Compound Head and Shoulders Bottom patterns can be roughly divided into the following categories:
One head and two shoulders mode
One head and multiple shoulders mode
Multi head and one-shoulder pattern
Multi-head and multi-shoulders pattern
1) Technical characteristics of compound Head and Shoulders Bottom pattern
The compound Head and Shoulders Bottom pattern is a complex trend of the Head and Shoulders Bottom pattern, which is basically the same as the ordinary Head and Shoulders Bottom pattern as a whole.
2) The technical meaning of the compound Head and Shoulders Bottom pattern
The technical meaning of the compound Head and Shoulders Bottom pattern is the same as that of the ordinary Head and Shoulders Bottom pattern.

Disclaimer:
This article is for reference only.
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Regarding technical analysis, market judgment, trading skills, trader sharing, etc., may involve potential risks, investment variables and uncertainties.
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