How to Trade with the Head and Shoulders Pattern
Head and Shoulders
A head and shoulders pattern is also a reversal formation trend.
This pattern formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder). A “neckline” is drawn by connecting the lowest points of the two troughs. The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.
From this example, you can easily see the head and shoulders pattern.
The head is the second peak and is the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head.
From this formation, you can put an entry order below the neckline.
We can easily calculate a target by measuring the high point of the head to the neckline. This distance shows approximately how far the price will move after it breaks the neckline.
we can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.
We know what you are thinking. “the price kept moving even after it reached the target.”
And our response is, “DON”T BE GREEDY!”
Inverse Head and Shoulders
It is basically a head and shoulders formation, except this time it’s upside down.
A valley is formed (shoulder), followed by an even lower valley (head), and then another higher valley (shoulder). These formations occur after extended downward movements.
We can see that this is just like a head and shoulders pattern, but it’s flipped upside down. With this formation, we would place a long entry order above the neckline.
We will calculate our target just like the head and shoulders pattern. Measure the distance between the head and the neckline, and that is approximately the distance that the price will move after it breaks the neckline.
We can see that the price moved up nicely after it broke the neckline.
Be happy with your profits If your target was hit. However, there are trade management techniques where you can lock in some of your profits and still keep your trade open in case the price continues to move your way.
You will learn more about those later on in the course.
Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.
Technical Analysis in Forex Trading
|Lesson 1||Types of Technical Analysis Indicators|
|Lesson 2||Forex Trading Trendline Analysis|
|Lesson 3||Forex trading Chart Patterns|
|Lesson 3.2||Double Tops and Double Bottoms|
|Lesson 3.3||Head and Shoulders Pattern|
|Lesson 3.4||Rectangle Chart Patterns|
|Lesson 3.5||Triangle Chart Patterns|
|Lesson 4||Japanese candlestick Trading Strategy|
|Lesson 4.2||Japanese candlestick Trading Strategy Part 2|
|Lesson 5||Support and Resistance Levels|
|Lesson 6||Types of Technical Analysis Indicators|
|Lesson 6.2||moving averages Technical Analysis|
|Lesson 6.3||MACD Indicator Technical Analysis|
|Lesson 6.4||RSI Indicator Technical Analysis|
|Lesson 6.5||Stochastics Indicator Technical Analysis|
|Lesson 6.6||Technical Analysis with Bollinger bands Indicator|
|Lesson 7||Fibonacci Retracement Forex Strategy|
|Lesson 8||Forex Trading Pivot Strategies|