08/29/2023 |
Next-Level Intelligence: Automated Head and Shoulders Pattern Recognition
Hello, traders, and welcome to another software update for your friends here at TrendSpider! In this update, we’re pleased to expand the functionality of our Automated Chart Pattern Recognition tool by adding Head and Shoulders and Inverse Head and Shoulders to the list of automatically discoverable patterns. Details after the jump!
One of the most popular patterns traders of all types like to look out for are Head and Shoulders and Inverse Head and Shoulders patterns, as they can represent important reversals in the direction of an asset.
Head and Shoulders Patterns, Explained
Head and Shoulders
The Head and Shoulders is a pattern that appears as a baseline with three peaks, the middle peak being the highest peak, forming what looks like two shoulders and a head. The pattern is formed when the price of an asset is in an uptrend and then reverses, forming the left shoulder, followed by a new high forming the head, and then a decline forming the right shoulder. The neckline is formed by connecting the low points of the two troughs, creating an important level of support.
The pattern is considered a trend reversal pattern. If the price breaks below the neckline, it could indicate a bearish trend, while a break above the neckline could negate the pattern. The pattern is one of the most widely recognized and studied patterns in technical analysis.
Inverse Head and Shoulders
The Inverse Head and Shoulders is a chart pattern that signals a potential reversal of a downtrend. It is the opposite of the Head and Shoulders pattern and consists of three troughs with the middle trough being the lowest (the “head”) and the other two forming the “shoulders”. The pattern is completed when the price breaks through the neckline, which is drawn through the peaks of the pattern.
This breakout typically indicates a reversal in the current downtrend, and traders often use this signal as a buying opportunity. The Inverse Head and Shoulders is considered a reliable pattern by many traders, but like all technical analysis, it should be used in combination with other indicators to confirm a potential trend reversal.
How To Add H&S and iH&S Patterns To Your Chart
Head and Shoulders and Inverse Head and Shoulders patterns can now be added to your chart automatically via the ‘Chart Patterns’ button in your top toolbar. Simply select either the ‘Head and Shoulders’ or ‘Inverse Head and Shoulders’ options to have the platform automatically detect and draw them on any chart they exist on.
Pattern Parameters
The Head and Shoulders and Inverse Head and Shoulders chart patterns offer several different settings that can be adjusted to influence where and how these patterns are drawn. In the image below, you’ll see several drop-down menus titled ‘Retracement’, ‘Depth’, ‘Deviation’, ‘Back Step’, ‘Bands’, and ‘Head Height’.
Retracement
The retracement setting automatically creates Fibonacci levels off of the selected ‘leg’ of the pattern. Traders can choose to have this Fibonacci sequence drawn on the Left Leg, Left Trough-Shoulder, Left Trough-Head, Right Trough-Head, Right Trough-Shoulder, or Right Leg. In addition, traders can choose up to five unique Fibonacci levels of their choice.
Depth
Depth represents the number of candles without a second maximum or minimum deviation of the previous pivot. A candle cannot form a head or shoulder unless it is higher or lower than the previous high/low candle plus the depth value. With this in mind, the larger the depth setting, the more candles in between each of the points of the pattern and, therefore, the more likely the pattern will be present farther back in the chart.
Deviation
Deviation defines the vertical distance from the previous pivot point. In essence, the larger the value, the deeper the troughs, and the smaller the value, the more shallow the troughs.
Back Step
The back step parameter refers to the number of bars or candles that must pass before the pattern can change direction and draw a new line or swing.
Bands
The ‘Bands’ option allows traders to add various styles of bands around the horizontal levels that coincide with the shoulders and head, as well as the neckline. These bands can be measured via an ATR, a Standard Deviation, a Constant, or a Percentage value.
Head Height
The head height allows users to define the percentage distance between the head and left shoulder. By default, this option is set to ‘Any’ but traders can choose to define one of four options pictured below.
Scanning For Head and Shoulders Patterns
Scanning for Head and Shoulders and Inverse Head and Shoulders pattern conditions is easy! To do so, click the ‘Add Parameter’ option and then select the ‘Chart Pattern’ condition. Once selected, you’ll see a drop-down menu containing the options pictured below.
If you’d like to scan for charts containing just the pattern itself, you can utilize any of the options shown above and the ‘Exists’ prompt. This will find all relevant charts containing the particular pattern you’ve chosen.
You can also define price relative to the horizontal levels of the pattern or the horizontal levels relative to one another.
In addition, we offer pre-built scans for several of the most basic Head and Shoulders and Inverse Head and Shoulders pattern setups that traders might be interested in finding. To access these, begin typing ‘Head &’ into the search bar of your scanner and the available shared scans will populate.
Available Head and Shoulders and Inverse Head and Shoulders Scans
- Head and Shoulders Exists
- Head and Shoulders In-Force
- Inverse Head and Shoulders Exists
- Inverse Head and Shoulders In-Force
- Head and Shoulders Breakdown/Retest
- Inverse Head and Shoulders Breakout/Retest
As always, we hope you find these updates helpful. If you have any questions, feel free to contact us via the ‘Contact Us’ button in the bottom left-hand corner of your charts!
