The head and shoulders pattern has some key rules you want to follow when looking for it and trade it. The head and shoulders pattern is a bearish reversal pattern. You are trading this pattern looking for price to make a move back lower. With this in mind this pattern works best when price has been making a trend higher. After the trend higher and the head and shoulders forms, you can then start to look for reversal trades back lower.

There are a few different ways to enter the head and shoulders pattern, but in this lesson I am going to show you the two highest probability entry strategies. The first entry strategy is the most agressive. This strategy is higher risk, but it also ensure you will not miss any potential trades. Checkout the example chart below. Price has formed the head and shoulders pattern and we have identified the neckline of the pattern.

To make an entry we are looking for price to confirm the pattern and break lower and below the neckline. Once this occurs we can enter short trades. You can enter either manually or with a pending sell stop order. The second entry strategy is more conservative, but higher probability.

With this strategy you will run the risk of missing out on potential trades. Once you have noticed that price has broken below the neckline, then you are looking for price to make a re-test. When price makes a re-test of the old neckline support and new resistance you can enter short trades.

To further increase your trades odds you can also look for bearish rejection candlesticks at this level to confirm that price has rejected this resistance level. There are two common profit target strategies with the head and shoulders pattern. The first strategy is using the next major support level as your profit target. This is very straightforward. All you have to do is use the same time frame you are trading the head and shoulders to find the next major support and set your profit target there.

The other strategy involves looking at the distance between the middle peaks high and the neckline. Price will often move the same distance after breaking out that it has from these two points. If you are putting your stop above the right shoulder, then you will also be able to often get a risk reward trade.

Oddly enough the inverse head and shoulders is exactly what it sounds like, the head and shoulders pattern, but inverse. With this pattern you are now looking for a bullish reversal after price has been making a move lower. Another bonus of this forex indicator is that it also helps you identify inverse head and shoulders patterns. That means you need to use your sharp eyes and knowledge about Forex head and shoulders chart patterns to get into a trade instead of relying on this indicator.

Save my name, email, and website in this browser for the next time I comment. Attachment The maximum upload file size: 5 MB. You can upload: image , audio , video , document , spreadsheet , interactive , text , archive , other. Links to YouTube, Facebook, Twitter and other services inserted in the comment text will be automatically embedded.

Drop file here. Notify me of follow-up comments by email. Therefore, if trading such a pattern on the daily chart then we can choose even a lower expiration date when compared with one day as the more price retraces for the right shoulder the more attractive lowering the expiration date should be.

In comparison with Elliott Waves Theory , the head and shoulders pattern is actually representing a contracting triangle, a so called special type of a triangle. It is a well known fact now that a contracting triangle has five legs and they are labeled with letters a-b-c-d-e. These five legs are corrective and the triangle is evolving between the a-c and b-d trend lines. Therefore, taking a trend line and connecting the a and c and b and d points, the outcome should be a pattern that contracts, namely the a-c and b-d trend line should meet somewhere on the right side of the chart.

However, in order to have the head and shoulders pattern the triangle should be formed from the a and e and b and d trend lines, and this is being called a triangle with the a-e base line. Disclaimer: This website is independent of of all forex, crypto and binary brokers featured on it.

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This is not a guide for the advanced traders only. Before you can trade it, you must first know the key attributes of the pattern. That way you can easily spot the most favorable head and shoulders to trade. However, we need both shoulders and the head of the pattern before we can identify the neckline.

It will make more sense as you progress through the lesson. Exclusive Bonus: Download the Head and Shoulders PDF Cheat Sheet that will show you everything you need to know to make money from this reversal pattern. The very first part of a head and shoulders pattern is the uptrend. This is the extended move higher that eventually leads to exhaustion. As a general rule, the longer the uptrend lasts, the more substantial the reversal is likely to be. The market moves down to form a higher low.

Now that the left shoulder has formed, the market makes a higher high which forms the head. But despite the bullish rally, buyers are unable to make a substantially higher low.

At this point, we have the left shoulder and the head of the structure. The neckline is also beginning to take shape, but we need the right shoulder before we can draw the neckline on our chart. The right shoulder is where things come together.

As soon as the right shoulder begins, we have enough to start plotting the neckline. Now that we have a defined head and two shoulders we can draw neckline support. This level will become a key component when we get into how to trade the breakout. All price action carries with it a message. But what is it about the pattern that causes the market to reverse? How can a few simple swing highs accomplish this? These are the kind of questions that will help you unlock the clues and take you to the next level.

The way I phrased the two questions above fails to capture the essence of the head and shoulders pattern. The pattern is just the outcome or byproduct of that process. Notice how after carving out a higher high head and pulling back, buyers were unable to push the price back above the head. This eventually formed the right shoulder. However, a trend is not technically broken until we get a lower high and a lower low. Note how the price action inside the second red circle above took out the last swing low.

It works because of the way in which the highs and lows develop and interact with each other at the top of an uptrend. Always remember to keep it simple. A common mistake among Forex traders is to assume the pattern is complete once the right shoulder forms.

Notice in the illustration above that the market has closed below the neckline. This confirms the head and shoulders pattern and also signals a breakout. Pro Tip: If you are on the daily chart, you would want to wait for a daily close below the neckline before considering an entry. Notice how it took a daily close below neckline support to constitute a confirmed break.

While there were a few previous sessions that came close to breaking the level, they never actually closed below support. So far in this lesson, we have covered the five attributes of a head and shoulders pattern. Now for the really fun part — how to trade and of course profit from a head and shoulders reversal. There are two schools of thought on how to enter a breakout.

The first is to use a pending order to go short just below the neckline. Note that those who use this method are not waiting for the market to close below the neckline. The problem with this approach is that you leave yourself exposed to the possibility of a false break. Which brings us to the second approach, and the one I prefer. This method involves waiting for a daily close below the neckline before considering an entry.

By doing this, you mitigate the risk of having the market snap back on your position and stop you out for a loss. But even when waiting for the market to close below the neckline there are two entry methods to consider. The first way to enter a head and shoulders break is to sell as soon as the candle closes below support. That would be our signal to go short sell.

While the method above has its uses, I usually prefer to wait for a retest of the neckline as new resistance. This combination is why I almost always opt for the second method. There is, of course, a greater chance of missing an entry by waiting, but the potential reward for doing so is equally great.

Despite being straightforward, the stop loss placement when trading the head and shoulders is a controversial topic. Some traders prefer a stop above the right shoulder whereas others choose a more aggressive placement. With that said, I tend to believe that a stop loss above the right shoulder is excessive.

It unnecessarily and adversely affects your risk to reward ratio. A head and shoulders is confirmed with a close below the neckline, right? So a close back above that same level would negate the pattern. Now, assuming my stop is above the right shoulder, am I going to wait for the market to take me out if it closes back above the neckline?

So really there are three ways to exit the trade should things turn sour. If we divide that into the objective, we get 3. This is my preferred stop loss placement. Just remember that the closer your stop loss is to your entry the greater the chance of being taken out of the trade prematurely. I call this my safety net.

Because any daily close back above the neckline suggests invalidation. Referring to the GBPJPY example above, if the market had closed back above the neckline after it closed below it, we would want to exit the trade. Such a close would signal that the pattern is no longer valid and that sellers are no longer in control. In fact, this notion can be applied to just about any pattern you trade.

It can help reduce the size of a loss in the event the market turns against you. Knowing when to take profit can mean the difference between a winning trade and a losing one. When it comes to the head and shoulders pattern, there are two ways to approach it. And for some, a blend of the two may be the way to go. The first and more conservative approach is to book profit at the first key support level. As such, it may be a good idea to take profit on a retest of one of these areas.

Because every situation is different, these support levels will vary. But the one thing that must always be true is a favorable risk to reward ratio. So always be sure to do the math before taking the trade.

So regardless of the situation, you will always have a specific target area. Note that I measure from the top of the head directly below to the neckline. I then take that same distance and measure lower from the breakout point. Measuring from this point is a small but significant detail, especially for necklines that develop at an angle. One last note about measured objectives.

Although they can be extremely accurate, they are rarely perfect. Also, try to find a key support level that intersects with or at least comes close to the measured objective. This will help you validate the target area and give you a greater degree of confidence during the trade. So to start wrapping things up, here are a couple more examples of the head and shoulders in action. Be sure to take note how each structure forms in its own unique way yet is still highly effective at signaling a reversal.

Notice how in this case the measured objective lined up with a key pivot area. A significant difference here from the first EURCAD reversal is that the USDJPY neckline is a horizontal level.

In most cases, the neckline support will form at a diagonal. The pitch of the level can vary, but one thing must always be true — the level should move from lower left to upper right. Note the angle on the first EURCAD chart above. But there are a few key insights I want to share with you before you go. Think of these as rules to follow when trading the head and shoulders pattern. This rule is self-explanatory. It can only be a bearish reversal pattern if it forms after an extended move higher.

One way to double check is to make sure there are no immediate swing highs to the left of the formation. Take a look at the charts above. Notice all the white space to the left. The same applies to this technical pattern.

Such a pattern is formed out of the following: two shoulders left and right one head a neckline a measured move The first thing to take into consideration is the head as this is the one that is striking, the sense that it is being characterized by a quick spike to the upside in the case of a head and shoulders pattern followed by a quick retrace and then price starts to consolidate. The blue line represents the neck line of the pattern, which goes through the two bottoms at the base of the head. Joseph says It is very informative, clear and concise sir. your email. The website does not provide investment services or personal recommendations to clients to trade any financial instrument. com should not be seen as a recommendation to trade CFDs or cryptocurrencies or to be considered as investment advice.

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