Ever wondered what the head and shoulders pattern is and how to trade it? Well, in here, I will try my best to explain what it is, how you can spot it and how to trade it.
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WHAT IS THE HEAD AND SHOULDERS PATTERN? DEFINITION AND EXAMPLES
What is the head and shoulders pattern? Well, this is the definition of a head and shoulder pattern: it is simply a bearish chart pattern that has a head and shoulders on both sides of the head…just like a human. Well, in this case, not exactly right but that’s the idea anyway.
Ok, that is In this post, you will have answers to questions such as these:
- Is the head and shoulders pattern a bullish or bearish pattern?
- is the head and sholders pattern a continuation pattern?
- What does the head and shoulder pattern look like?
- How do you trade the head and shoulder pattern?
- Are there any head and shoulder pattern MT4 indicators out there?
This chart below shows what a head and shoulders pattern looks like in an ideal case:
But in reality, there are some “noise” and you really have to eliminate the noise to really identify the head and shoulders chart pattern when it is forming.
The following few charts show what a head and shoulders pattern looks like:
or like this:
#1: IS THE HEAD HEAD AND SHOULDERS PATTERN A CONTINUATION PATTERN?
No. The head and shoulders pattern is not a continuation pattern but a bearish reversal chart pattern.
So you should be looking for a head and shoulders pattern in an uptrend.
Now, lets get down deeper to understand how the head and shoulders chart pattern forms
For a head and shoulders chart pattern to form, the following 4 things must happen in order:
- Market is in an uptrend.
- Price rises and forms a peak or top then falls. This first peak price forms is the left shoulder.
- Then price rices and goes past the first peak, makes a second peak and then falls again. This 2nd peak is called the head. The head is always higher than the left shoulder.
- then price rises for the third time but does not go past the second peak (the head) and falls again. This third peak is called the right shoulder. The right shoulders also must not be higher than the head. The head must always be taller than both shoulders.
#2: 3 REASONS WHY THE NECKLINE OF THE HEAD AND SHOULDERS PATTERN IS IMPORTANT
The neckline is an important part of the head and shoulders pattern? Do you know the reasons why? Well, I will tell you:
- Because this forms the support level for price.
- The breakout of the neckline is your full confirmation that this is a head and shoulders chart pattern happening.
- the neckline and the head of the pattern are used to calculate the profit target. I will show you how, below.
#3: HOW TO TRADE THE HEAD AND SHOULDERS CHART PATTERN
Here are some important points you need to know:
- A head and shoulders pattern is not complete if the right shoulder is not yet clearly formed
- the only time you can say confidently that “this is head and shoulders pattern” is when the right shoulder is formed and price is heading down and touching the neckline.
- That’s when you start getting prepared to trade the head and shoulders chart pattern because now you are anticipating a breakout of the neckline.
So how do you actually trade the head and shoulders chart pattern?
- The basic/main way to trade the head and shoulders chart pattern is to wait for a breakout of the neckline.
- This happens when you see a bearish candlestick closing below the neckline. This is your sell signal.
- So as soon as that neckline breakout candlestick is confirmed, on the formation of the next candle, you can either sell at market order or place a pending sell stop order a few pips below the low of that bearish breakout candlestick.
- Your can place your stop loss a few pips above the high of the breakout candlestick.
#4: HOW TO CALCULATE THE PROFIT TARGET OF A HEAD AND SHOULDERS CHART PATTERN
What you see and read in many trading sites say that you have to measure the distance in pips between the head and the neckline and whatever that number is, that will be your target profit in pips.
So once you get that number, subtract that pips from your entry price and that will give you your price level to set your take profit target at on your sell order.
The chart below helps to make this clear:
Notice on the chart above the 2 blue lines? The top line is the pip distance between the head and the neckline and that distance is used to calculate the profit target as seen on the second blue line below.
#5: WHAT TIMEFRAMES CAN THE HEAD AND SHOULDERS CHART PATTERN FORM?
You can find the head and shoulders chart pattern in all timeframes. But here’s a fact, the larger timeframes bring in more profits than trading from smaller timeframes and also the head and shoulder patterns found there are much more reliable (in my humble opinion).
But again, its really up to you what timeframe you want to trade.
#6: ANY HEAD AND SHOULDERS PATTERN FOREX TRADING STRATEGIES?
Are there any forex trading strategies on forextradingstrategies4u.com that are built around the concept of head and shoulders pattern?
You bet! Here they are:
- head and shoulders chart pattern forex trading strategy
- inverse head and shoulders chart pattern forex trading strategy
#7: ANY HEAD AND SHOULDERS PATTERN MT4 INDICATORS?
I haven’t seen a reliable head and shoulders MT4 indicator yet. If you know of one, I’d be really happy if you can leave a comment below and point me in the right direction so I can get my hands on it as well and post it here so many forex traders can enjoy.
- the head and shoulders pattern is a bearish reversal chart pattern and not a continuation pattern.
- it is a reliable bearish pattern that can bring hundreds of pips when you trade it using larger timeframes.
- you only look for this pattern when the market is in an uptrend.
- the head and shoulder pattern is confirmed when the neckline is formed.
- the head and shoulders pattern can form in any timeframe
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