What Is a Neckline?

The neckline is a level of support or 澳洲幸运5开奖号码历史查询:resistance found on a 澳洲幸运5开奖号码历史查询:head and shoulders pattern that is used by traders to determine strategic areas to place orders. A neckline connects the 澳洲幸运5开奖号码历史查询:swing lows (which occur following the first two peaks) of the head and shoulders topping pattern. A move below the neckline signals a 🍌breakout of the pattern and indicates that a reversal to the downside of the prior uptrend is underway.

In the case of a head and shoulders bottoming pattern, called an 澳洲幸运5开奖号码历史查询:inverse head and shoulders, the neckline connects the two 澳洲幸运5开奖号码历史查询:swing highs of the pattern and extends out to the right. When the price rises abov♌e the neckline it signals a breakout of the pattern and a reversal to the ꦇupside of the prior downtrend.

What Does a Neckline Tell You?

The neckline is the part of the head and shoulders chart pattern that connects the two reaction lows (topping pattern) or highs (bottoming pattern) to form an area of support or resistance. The head and shoulders chart pattern is commonly used to predict bullish or bearish 澳洲幸运5开奖号码历史查询:reversals.

When the pri༺ce breaks below the neckline of a topping pattern it means the prior uptrend is likely over, and a downtrend i𝕴s underway. When the price breaks above the neckline of an inverse pattern it means the prior downtrend is likely over, and an uptrend is underway.

The neckline is ꦆa straight line that connects the lows (top) or highs (inverse) and is extended out to the right. After the head and shoulders form their third peak (top), if the price drops below the n꧙eckline, then the pattern is considered complete and a further downside move is expected.

The neckline's slope may sometimes need to be drawn at an angle, rather than horizontal. This is because the reaction lows or highs may not always be equal, and therefore, the line will take on a slope when connecting them. If the neckline is severely sloped higher or lower, then it is less useful for trading and ana⛎lytical purposes.

Often, the head and shoulders pattern is used in conjunction with other forms of technical analysis that serve as confirmation, including other chart patterns or technical indicators. For example, if the 澳洲幸运5开奖号码历史查询:relative strength index (RSI) or 澳洲幸运5开奖号码历史查询:moving avera𝓰ge convergence divergence (MACD) indicator was showing 澳洲幸运5开奖号码历史查询:bearish divergence heading into the𒁏 head and shoulders pattern, some traders would view that as added confirmation that the price is more likely to head lower after the downside neckline breakout.

Head and Shoulders Pattern

A head and shoulders pattern form after an uptrend and is composed of a peak, a 澳洲幸运5开奖号码历史查询:retracement, a high🦋er second peak, a retracement, a lower third peak, and a drop below the neckline.

Some traders enter short or exit 澳洲幸运5开奖号码历史查询:long positions when the price drops below the neckline. For those entering short, a 澳洲幸运5开奖号码历史查询:stop loss is often placed above a recent swi✃ng high or above the high of the third peak.

The estimated downside move for the head and shoulders is the height of the pattern—which is the difference between the prices of the second peak to the lowest low of the two retracements—subtracted from the neckline breakout point. This is called the 澳洲幸运5开奖号码历史查询:price target. There are no guarantees the price will reach that level, or that it will 𒊎stop falling at that levelಞ. It is just an estimate.

The same concepts apply to an inverse head and shoulders, except in reverse. The pattern forms after a 澳洲幸运5开奖号码历史查询:downtrend and is co𒁏mposed of a low, a move higher, a lower low, a move up, a third higher low, and then a rally above the neckline.

Some traders enter long positions or exi🎉t short positions when the price rises above the neckline. For those entering longs, a stop loss is often placed below a recent swing low or below the low of the third low.

Example of How to Use a Neckline

A head and shoulders pattern is formed in the GBP/USD,💟 which is the currency exchange rate between the Brit🐻ish pound and the U.S. dollar.

The head and shoulders pattern is formed by a first peak, a second higher peak, and then a third lower peak, with retracements in between. The neckline connects the lows of the🧔 retraceไments and is extended out to the right.

Following the third peak, the price breaks below the neckline signaling further downside may be lik🐠ely. The height of the pattern is subtracted from the neckline breakout poinꦚt to provide an estimated price target for the move down.

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