Let's understand one of the most reliable patterns in technical analysis. The head and shoulders pattern is a classic formation that often precedes a trend reversal. If you're not yet familiar with it, now is the time to learn.

What does this formation look like? Imagine three peaks on a chart. The first peak is the left shoulder, then a higher point in the center, which is the head, and finally the third peak—the right shoulder, usually roughly at the same level as the left. Between these peaks are dips connected by the so-called neckline. This line can be horizontal or slightly inclined.

Where to look for the head and shoulders? This pattern forms exclusively in uptrends. If an asset has been rising for a long time and then begins to form this characteristic configuration, it’s a signal to be cautious. On Bitcoin charts and other major assets, this formation can be seen quite often. Check the volume: usually, during the formation of the right shoulder, volume decreases, but during the breakout of the neckline, it sharply increases.

How to use this in trading? When the price breaks below the neckline, it’s a classic signal to enter a short position. Many traders open shorts at this moment, expecting a downward trend. It makes sense to set a stop-loss slightly above the right shoulder to protect the position from false breakouts.

To determine the target price, measure the distance from the top of the head to the neckline, then project this same distance downward from the breakout point. This will give you an approximate price target. Remember, head and shoulders is not a guarantee but a probabilistic scenario, so always apply proper risk management and do not risk more than you are willing to lose.