Trading Technical Analysis – Head and shoulder pattern
Head and shoulder pattern
Within the trading world, learning the trading technical analysis is critical. One of those trading technical analyses is patterns. One of the most typical formations we often see on our trading chart platform is the head and shoulder pattern. In today’s post, we will share with you what head and shoulder patterns are and how to analyze them. Which can help you speculate future market price movements.
Based on trading technical analysis theory, head and shoulder formations are signs of a potential reversal within the forex market. Understanding head and shoulder trading patterns are relative to analyzing support and resistance levels.
Head and shoulder patterns may often appear on various timeframes. The examples you will see in this post fits 15 minutes and up forex chart timeframes. These trading patterns analysis works better on longer time frames. Including a 4-hour chart timeframe up to a daily chart timeframe. But this pattern doesn’t occur frequently. Try practising on lower time frames to have great fundamental knowledge on how to analyze this pattern on the live forex market. Also, logically speaking, looking at a larger time frame chart may result in a higher profit (or loss), and the trade will also take a longer time to end.
Look at the sample head and shoulder pattern chart above. You can see how the pattern went right out of the support and resistance level. Looking for a head and shoulder pattern is a great thing, but combining it with a support and resistance line give traders the edge to speculate future market movements.
Looking at a longer time frame ( a daily chart), we could see the head and shoulder pattern forcing the price to pass the support or resistance level which could later retreat towards the neckline.
There are instances when the market price bounces upwards after a fallback on the resistance zone which completes the head and shoulder pattern.
Once you’ve identified the head and shoulder pattern with the support and resistance mark/line, then you can speculate when will be the best position to enter the trade.
Entering a trade on a head and shoulder pattern
The initial entry for head and shoulder formation is to sell if the market price is below the neckline, which in the sample graph above is also the support and resistance level. Do sell on the opening of the candlestick following the other which is close to the neckline of our head and shoulder pattern.
Note: Support or resistance level within the head and shoulder pattern will always be the neckline.
On the above sample graph, we’ll show another way of entering a trade. Rather than selling on the initial break, you could also wait for the market price to pass through the neckline, providing you with more confidence in entering a trade. Make an entry when the price breaks the second time around. Remember to enter an opening of a candlestick following the second candle close to the neckline. To add up, place a stop loss close above the last shoulder of the head and shoulder pattern.
On our next graph sample, we’ll consider USD/CHF to point out another way of entering a trade. Observing the graph below we could see an opportunity by waiting for the price to pass through the neckline attempting to go back up the neckline. There you could also make a trade entry.
Even though this pattern doesn’t happen frequently, there is a huge chance of a bounce off when the price attempts to come back at the neckline. That provides traders with an opportunity to enter a trade on a neckline after the market price already crossed over.
Head and shoulder formations aren’t always flat; they also appear in a sloping pattern. Still, seeing a valid entry close to a support or resistance level on a sloped head and shoulder pattern is possible. But the majority of the traders prefer using the traditional strategy on a flat head and shoulder formation.
Exiting a trade on a head and shoulder pattern
Before exiting a trade, it is necessary to look for the difference in pips within the neckline up to the top of the formation’s head. The numbers within that set could be your profit target and your exit point.
An important reminder not to risk more than 5% of your trading account on a single trade. Meaning if you have a total of $15,000 on your trading account, you can do up to $750 per trade (and that’s your limit).
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