Head and Shoulders Pattern

by bug man, 5429 days ago

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The head and shoulders pattern is a reversal pattern that generally occurs in uptrends. The pattern contains three peaks - the left shoulder, the head and the right shoulder. It is called Head and Shoulders because the pattern visually looks similar to that of a head with two shoulders. The middle peak or the head is the highest one and the two other peaks - shoulders - should be roughly equal. The line that connects the low of the prices that occur between the left peak and the middle peak and the middle peak and right peak, is called the neckline.

The other type of head and shoulders pattern is called the head and shoulders inverse pattern. It is the inversed version of the head and shoulders pattern and generally occurs in downtrends to signal that a reversal is to be expected.

The head and shoulders pattern could be considered as a complex pattern in technical analysis. It is very difficult to implement in a trading software. Although, it is not that hard with the use of the advanced rules of QuantShare, but one should master them first.

With the help of this downloader, head and shoulders signals are downloaded directly from the finviz.com website. Each time you run this item, the head and shoulders as well as the head and shoulders inverse patterns that are detected and that occurred to US stocks are retrieved and saved in a custom database. This data can be used for multiple purposes, a stock trader could use them in a watchlist or in screening while a mechanical stock trader could collect data for some months and then performs backtesting and analysis.

Pattern formation or the period it takes to form these Head and Shoulders patterns spans from 5 months to a year. The pattern could be detected using lower period, but this is the way finviz.com generates these signals.

After a pattern is detected, the new price target is generally admitted to be equal to the current price minus the distance between the neckline and the top of the head. This applies to the Head and Shoulders pattern, however the Head and Shoulders Inverse pattern price target should be equal to the current price plus the distance between the neckline and the top of the head.

These price targets are just rough estimates and should be considered with other factors, including previous support levels, long term moving averages...

The newly created database, whose name is "head_shoulders", is an historical database that contains two fields:
HS: This field has a value equal to one in case a head and shoulders pattern occurred for a particular date and symbol.
HSI: This field is equal to one in case a head and shoulders inverse pattern occurred for a particular date and symbol.

Using the 'GetData' function, you can access these Head & Shoulders signals directly from the QuantShare language.
Example:
a = GetData("head_shoulders", "hs", LastData);
plot(a, "hs", colorRed,ChartLine,StyleOwnScale);