What is OBO (Head and Shoulder) Formation?
What is OBO (Head and Shoulder) Formation
What is OBO (Head and Shoulder) Formation?
OBO (Head and Shoulders) formation is a formation frequently used in technical analysis and indicates the reversal of a certain trend on the price chart. “Head and Shoulders” gets its name because the formation process of the formation creates shoulders, a head and a neck line on the chart.
The OBO formation usually occurs at the end of an uptrend. The formation is defined by a peak (head) between two peaks (shoulders) on the chart and a neckline connecting them. The shoulders are usually about the same height, while the head peak is higher. The neckline is a support line connecting the lows of the shoulders.
Once the OBO pattern is completed, the price usually breaks down the neckline and enters a downtrend. This indicates that the uptrend is weakening and the downtrend is gaining strength.
The OBO pattern is used by investors to identify market trends and make price predictions because it indicates a trend reversal. However, like every technical analysis tool, the OBO formation should not be used alone and should be evaluated together with other indicators and analysis methods.
First Shoulder:
First, prices have risen for a long time and reached a certain peak. This point is where the first shoulder forms. Prices usually consolidate briefly at this peak.
Bottom and Rise:
After the first shoulder forms, prices drop slightly and then rise again. However, this rise usually does not exceed the top of the first shoulder.
Head:
In the second phase, prices rise again and form a new peak. This point is the highest point of the formation and is called the head. The head is usually slightly higher than the peak of the first shoulder.
Second Shoulder:
After the head formation, prices decline once again and approach the level where the first shoulder formed. This point is where the second shoulder forms. The second shoulder is usually at the same or slightly higher level than the first shoulder.
Neckline:
When combined with the bottom of the second shoulder, a line called the neck line is formed. The neckline is usually a horizontal or slightly sloping line.
Downtrend:
Once the OBO formation is complete, prices usually break down the neckline and enter a downtrend. This indicates that the uptrend is weakening and the downtrend is gaining strength.
What is Required for OBO Formation?
There are several important elements for the formation of the Shoulder Head and Shoulder (OBO) formation.
Uptrend: The OBO pattern usually occurs at the end of an uptrend. This indicates that prices have increased over a period of time and the market is generally rising.
Retracement: When the first shoulder occurs, prices usually correct slightly and continue to rise. However, this correction usually does not extend beyond the peak of the first shoulder.
Necklessness: In order for the Head-and-Shoulders formation to be completed, prices must break the neckline downwards. This indicates that prices have entered a downward trend and the OBO formation has formed.
The Head and Shoulders (OBO) pattern usually signals a trend reversal and indicates that prices may begin a downward trend. Following the completion of this pattern, investors typically use a variety of methods to determine a target price.
One of these methods is to measure the height of the neckline, starting from the point where the price broke below the neckline, after the completion of the OBO formation. This distance generally represents the difference between the highest point (head) of the formation and the bottom of the neckline. This distance is generally considered the formation's target decline distance.
In another of these methods, investors determine the target price by using the height of the shoulder line, which determines the formation of the OBO formation. Shoulder line height is the distance between the bottoms of the shoulders. This distance is measured from the beginning of the pattern to the point where the neckline breaks and can be used as a potential bearish target.
Some investors set target prices using Fibonacci retracement levels. In particular, Fibonacci retracement levels can be applied starting from the point where prices start to fall after the completion of the formation. These levels can serve as potential support and resistance levels and help determine the target price.
After completion of the OBO formation, important support or resistance levels may be found in the past and these levels may be taken into account in determining the target price. Support and resistance levels determined by examining previous price movements can help determine potential target prices.
Determining the Trend: First, the trend in which the formation occurs must be determined. OBO usually occurs at the end of an uptrend and signals the beginning of a downtrend.
Defining Shoulders and Head: The shoulders and head, which are the main components of the formation, should be defined on the chart. The left shoulder represents the initial peak and subsequent decline, while the head represents a higher peak. The right shoulder forms the second peak after the head.
Drawing the Neck Line: The neck line is drawn by combining the bottom levels of the left shoulder and the right shoulder. The neckline is usually a horizontal or slightly sloping line and is a critical level for the formation to complete.
Breakout: The completion of the formation occurs when prices break the neckline downwards. This may indicate the end of the uptrend and the beginning of the downtrend.
Volume Analysis: Volume should also be taken into account during the completion of the formation. Normally, volume increases during the break below the neckline. This may indicate that the downtrend is gaining strength.
Confirmation: Confirmation of the OBO pattern involves that prices should continue with a downward move after breaking the neckline. This confirms that the pattern has indeed completed and the downtrend is gaining strength.
The Head and Shoulders (OBO) pattern is a popular price pattern in technical analysis, marking a reversal of a particular trend on the price chart. To identify this pattern, the price chart of a particular financial instrument is first carefully examined. The OBO formation usually occurs at the end of an uptrend. The first phase is the left shoulder, where prices reach a certain peak and then experience some decline. Then comes the head phase, where prices break through the peak of the left shoulder to form a new peak. After the top is formed, prices drop once again and form a second top, forming the right shoulder.
After the left shoulder, head and right shoulder formations, the neck line is drawn. The neck line is created by connecting the bottom points of the left shoulder and the right shoulder. The neckline is usually a horizontal or slightly sloping line. It is an important level for the formation to be completed and the OBO formation is usually completed when the prices break the neckline downwards. This breakout may indicate that the uptrend is weakening and a downtrend is beginning.
The OBO formation is used in conjunction with other technical analysis tools and indicators to obtain stronger signals. Additionally, it is important to carefully monitor price movements and consider other market conditions to confirm this pattern. In this way, the OBO pattern can provide investors with important information about potential reversals and assist in trading decisions.
