I have added a page on this subject under Elliott Wave Magic. The link can be found on the side of this post. But first, let us take a quick look at what are the basic ingredients for a head and shoulders top.
1. There should have been a prior up trend
2. The head that is higher than both the shoulders should have been posted on lower volume than that seen in the left shoulder formation
3. The right shoulder should have been on lighter volume also, and should preferably finish either at the same level or lower than the left shoulder. It should definitely lower than the head!
4. The down move AFTER the right shoulder is posted should be preferably on increasing volume, especially as it breaks the neckline.
As you will observe, there is a lot of emphasis on volume. This is the point that most beginning analysts miss. In order to be a successful trader in the stock markets or forex markets, one needs to play the game sensibly. Never ignore the rules, and always be aware of the guidelines. Follow sound risk management policies. These will help you win more often.
Now turn to the illustrated post on the side. Enjoy!