How To Trade Head And Shoulders On Forex
Head and Shoulders is a reversal chart pattern that has been very popular among forex traders, stocks, commodities or other financial assets. You can recognize these patterns very easily, head and shoulders pattern consists of left shoulder, a head and then right shoulder. Our experience shows that this chart pattern is very profitable in forex trading. We will show how you can trade forex profitably with this pattern.
In addition to the left shoulder, head and the right shoulder, the most important part is the neckline. The Reversal movement of head and shoulders pattern will be stronger if its neckline is horizontal or flat.
Sometimes you will also find the neckline is slightly sloping down or up. When the neckline penetrated then it is the right time for open buy or sell positions. After the Neckline penetrated, sometimes the price is going to bounce back at the neckline to test its support or resistance level. There are two types of head and shoulders pattern, they are head and shoulders top and head and shoulders bottom.
Head and shoulders top occurs after an up trend/bullish. If we find this pattern then this will signify the end of the up trend. With the right settings we can get easy profit with this pattern.
Head and shoulders bottom occurs after down trend/bearish. If you find this pattern then this indicates the end of the down trend. We will show you with the examples below how you can profitably trade this pattern on foreign exchange market.
Head And Shoulders Forex Trading Examples
Below are the trade examples from EURO/USD with 1 hour chart. We’ll try to give you the best description so you can understand what are we talking about.
Head and Shoulders Top
The first is head and shoulders top. From the blue line we can recognize the up trend/bullish. After that we can see the pattern appears, when you see that you should get ready to put your position. We draw the neckline with the red line above. With the above example you can put your short trade stop order maybe 10 to 15 pips below the neck line for 1 hour chart(up to you, try to practice). The yellow check is where you can place you short trade stop order, or yo can open your short trade positions at the retrace on the second yellow check. We calculate the range between the neckline to the top of the head, its 132 pips. After that, you can place your target profit point for 132 pips too and place your stop-loss point for about 10 pips above the last shoulder. And it’s not a surprise that the Euro/USD went down for 240 pips. We’ve told you guys… if the neck line is horizontal or flat it means that the downward move is will be strong on head and shoulders top.
Head and Shoulders Bottom
The second is head and shoulders bottom. From the blue line we can recognize the down trend/bearish. After that we can see the pattern appears. We draw the neckline with the red line above, as you can see it’s not flat or horizontal neckline, it is bit sloping down. If the neck line is not flat or horizontal it means that the next up trend movement is not going to a strong move. With the above example you can put your buy stop order 10 to 15 pips above the neckline with the yellow check, or you can open your buy positions at the retrace on the second yellow check. We calculate the range between the neckline to the bottom of the head, its 216 pips. After that, you can place your target profit point for 216 pips too and place your stop-loss point for about 10 pips above the last shoulder. Well 216 pips target profit is not a must, you can put target profit maybe at 200 pips or less to make your trades safer, as an option you can make your profit and loss ratio 1 : 1 with this head and shoulders pattern.
We hope you’re inspired with this, head and shoulders chart pattern is easy to trade in forex.
