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Keys To Identifying and Trading The Head and Shoulders Pattern

This document discusses the head and shoulders chart pattern, a reversal pattern that appears as two shoulders and a head in between. It describes how to identify the pattern by looking for three peaks of different heights, and how to draw the neckline. A breakdown below the neckline triggers a short signal. The stop loss is placed above the right shoulder, and the target is measured as the head size below the breakout point. An inverted head and shoulders pattern signals a reversal from a bearish to bullish trend.

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Ambadnya-Amogh Anbhavane
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1K views3 pages

Keys To Identifying and Trading The Head and Shoulders Pattern

This document discusses the head and shoulders chart pattern, a reversal pattern that appears as two shoulders and a head in between. It describes how to identify the pattern by looking for three peaks of different heights, and how to draw the neckline. A breakdown below the neckline triggers a short signal. The stop loss is placed above the right shoulder, and the target is measured as the head size below the breakout point. An inverted head and shoulders pattern signals a reversal from a bearish to bullish trend.

Uploaded by

Ambadnya-Amogh Anbhavane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Summary Cheat Sheet: Keys to Identifying and Trading the Head and Shoulders Pattern

Head and Shoulders Pattern in Forex

 The Head and Shoulders pattern is a chart figure which has a reversal character. In this manner, the
formation represents the loss of faith in the prevailing trend.

 As you might image, the name of the formation comes from the visual characteristic of the pattern
– it appears in the form of two shoulders and a head in between.

 The pattern starts with the creation of a top on the chart. The price action then creates a second
top, which is higher than the first top. A third top is created afterwards, but it is lower than the
second top and is approximately at the same level as the first top.

Drawing the Head and Shoulders Chart Pattern

 The first important sign of an emerging Head and Shoulders reversal pattern comes from the
bottom created after the head is formed.

 If you have and established trend on the chart, this bottom is likely to create a slowdown in the
trend’s intensity. In many cases this bottom also creates a breakout from a bullish trend line

 Sometimes, during the formation of the right shoulder, price may test the already broken trendline
as a resistance
Head and Shoulders Neckline

 The Head and Shoulders neckline is considered the most important component in trading the H&S
pattern. The reason for this is that the H&S neckline acts as the trigger line for trading the pattern.

 The neckline needs to be manually drawn on your chart. To draw the neckline, you need to locate
two bottoms – the bottom just prior to the head formation, and the bottom just after the head
formation. Then you should connect these two swing points with a line.

 To get a valid H&S breakout, we need to see the price action breaking through the neck line of the
pattern. It is when a candle closes below the neckline, that a short signal is triggered for the Head
and Shoulders setup.
Head and Shoulders Stop Loss / Target

 The optimal place for your stop loss order is above the second shoulder on the chart. This
corresponds to top (3). When you short the Forex pair after a Head and Shoulders breakout signal,
you place the stop above the 3rd top of the pattern.

 The size of the Head and Shoulders structure holds a direct relationship with the potential target
for the trade.

 The Head and Shoulders price target can be measured using a two step process:

o Get the distance between the tip of the head and the neck line. This will yield the size of the
head and shoulders pattern.

o Now that you have the size of your H&S pattern on the chart, you should apply this length
downwards, starting from the initial breakout through the neck line. This is the price move
you should expect when trading the Head and Shoulders setup.

Inverted Head and Shoulders Pattern

 The Head and Shoulders pattern has its bullish equivalent. This is the inverted Head and Shoulders
pattern.

 Contrary to the H&S pattern, the inverse H&S pattern appears during a bearish trend and it implies
that the existing bearish tendency is likely to be reversed.

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