The head and shoulder chart pattern forex trading strategy is a price action strategy.
The head and shoulder chart pattern is based on a reversal pattern that is mostly seen in uptrends and in here, you will learn how to trade this pattern by learning to recognize this pattern when it starts to form and then trading it.
WHAT IS THE HEAD AND SHOULDERS PATTERN AND HOW DOES IT LOOK LIKE?
The head and shoulder chart pattern can form in any time frames, from 1 minute up to the monthly time frame. But do you know what it looks like?
Well, here’s a chart of what a head and shoulder chart pattern looks like in an ideal case:
But in the forex market, you see head and shoulders patterns that look more like this:
WHAT CAUSES THE HEAD AND SHOULDER CHART PATTERN TO FORM?
Price does not continue rising all the time or falling all the time. There will be times when it will reverse and go in the opposite direction.
So, if the market is in an uptrend, it will not always keep going up because sooner or later the uptrend will slow down and the forces of demand and supply will balance out and this can result in the head and shoulder pattern being formed.
Let me explain while referring to chart above:
- Sellers come in at the highs (left shoulder) and what happens is that the downside is probed (which results in a beginning neckline).
- What happens next is that buyers soon return to the market and push prices to new highs(the head).
- However, the new high (head) is not sustained as price falls back down due to sellers pushing price down to create a continuing neckline.
- Buyers enter again pushing the price up to a high, but this high does not exceed the previous high (the head). This high is the right shoulder.
- Sellers get in and push the price down and this time the neckline is intersected
- Buyers may get in here and push price up to test the neckline that was intersected which would now act as a resistance.
- Sellers get in push the price down.
HOW TO TRADE THE HEAD AND SHOULDER PATTERN
Currency Pairs: Any
Timeframes: preferably 5 minutes and above.
Forex Indicators: None required.
There are two options on how you can trade the head and shoulder pattern:
- Wait for a candlestick to break to break the neckline to the downside.
- Then place a sell stop order just a few pips (3-5 pips at least) under the low of the candlestick.
- Place you stop loss 3-5 pips above the high of the right shoulder.
- Once price breaks the neckline, just wait for price to rally back up to touch the neckline which it intersected. This intersected neckline would now act as a resistance line.
- Once it touches the neckline, place a sell stop order 3-5 pips under the low of the candlestick that touches the neckline.
- Place you stop loss anywhere from 10-50 pips(depending on which timeframe you are trading in) just above where your sell stop order is placed.
- Try to use reversal candlestick patterns as your short entry confirmation on this option 2 entry style.
WHERE TO PLACE YOU TAKE PROFIT TARGET
Here are a couple of options:
- Take profit option 1 is to 3 times the amount you risked in pips.
- A second option would be see a previous swing low point where price moved up from and use that level as your take profit target.
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