Market advances tend to get carried away with themselves sometimes as traders scramble to get onboard the uptrend while they can. Eventually, the market absorbs most of the buying interest and hits a peak, then starts to lose steam as there aren’t enough buyers left to propel the market higher.
Those holding long positions may also decide to take some profits, adding to the downward pressure and creating the first leg of the “M”. Prices drop back until they reach a point where buying comes back and the market begins to climb higher again after posting an interim low. If this new rally moves above the first high, the market may be on its way to forming the head of a head-and-shoulders formation. In many cases, however, the second high is below the first high or perhaps at about the same price level as the first high. Then, buying fades and prices begin to sink again, starting the second leg of the “M”. Nice strategies also part of trading system setup.