Head And Shoulders Price Objective

An important, but often overlooked, factor in technical analysis and chart patterns is the calculation of price objectives. This is a measure of where the price is considered to be headed, based on a confirmed pattern. While the price's direction is already known, based on the signal, what needs to be calculated is the projected price movement. This is done so that targets can be set, protective stops can be instituted and the worth of a trade can be evaluated









This is measured based on the height of the chart pattern, which is essentially the distance in price between the peak of the head and the neckline. For example, let's say that in a head-and-shoulders top, the peak of the head is formed at $50 and the neckline was established at $40 - a difference of $10.

The price objective is calculated by subtracting the price at which the pattern breaks the neckline ($40) by the difference between the head and the neckline ($10). Based on this example, the price objective is $30 ($40-$10).

This price objective is not an absolute and is used as a guideline to the attractiveness of a trade. The larger the difference between the objective and the price at the neckline, the more worth the trade has, as it will yield greater returns.

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