There are many trading patterns that traders use to make trading decisions: Trading patterns like triangle patterns, double tops and bottoms , cup and handles, etc. However, in this post i want to talk about head and shoulders pattern.
Here you are going to learn about two types of head and shoulders patterns: what is head and shoulders pattern and how to trade them.Without wasting anytime, let’sget started…
What is s head and shoulders pattern
A head and shoulders pattern is a trend reversal pattern that is formed at the end of an uptrend or downtrend and signal the end of a trend.
This pattern is formed by a left peak called a shoulder, a higher peak called a head , and a right peak called shoulder that is formed almost at the same level as the left shoulder.
There are two types of head and shoulders pattern: a head and shoulders top and a head and shoulder bottom also know as an inverse head and shoulders
Head and shoulders top
This pattern is formed at the end on an uptrend and it indicators a reversal movement. See the chart below.
Most important thing to remember is that a head and shoulders is not complete until the neckline is broken as shown above.
How to trade head and shoulders top pattern?
After you have drawn your neckline on your chart, wait for the price to retrace back to neckline. If the price touch and break the neckline, place your sell trade. Meaning the candlestick has to break and close below the neckline.
Once the candlestick break and close below the neckline, place a sell trade.
Protective stop loss
Place your stop loss few pips above the candlestick that touches the neckline
Take profit target
For take profit, measure the distance from the neckline to the head and use that as your take profit. If the distance between the neckline and the head is 120 pips ,the you should target 120 pips profit.
You can also use the previous swing lowas your take profit target. I used the following chart as an example.
Notice the bearish (red) candlestick that broke the neckline closed below the neckline. That’s when you place place a sell trade.
Head and shoulders bottom
head and shoulder bottom is the opposite of a head and shoulder top as you can see the picture below.
To trade the head and shoulder pattern, you simple wait for the neckline to be broken and then place a buy trade.
Protective Stop loss
Place your stop loss few pips below the candlestick that breaks the neckline
For take profit, measure the distance in pips between the neckline and the head and use that as your take profit. If the distance between the neckline and the head is 120 pips ,then your profit target should be 120 pips.
These patterns can be formed in all trading timeframe- from 1minutes up to monthly timeframe. However, those patterns that a formed on smaller time frames are not reliable therefore if you want to trade these patterns make sure you only trade those formed on daily and weekly timeframes.
Here is a cautionary note: head and shoulders patterns, just like other techniques, are not a completely reliable trading pattern. They do have false breakouts that’s is why it’s very important that you wait for the candlestick to close first, even so, the close of the candlestick won’t guarantee you a successful.
There you have it: heard and shoulders pattern
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