A Simple Price Pattern That Can Precede Big Moves

The head and shoulders pattern is a price reversal pattern that helps you identify when a big reversal may be underway after a trend has exhausted itself. The Head & Shoulders is currently shaping up on many EUR crosses in an inverted fashion which could pave the way for large moves higher. Head and shoulder patterns are complex in structure but easy in recognition which can help new and experienced traders’ a like jump in on the beginning of a new trend with well managed and defined risk.

What could be easier to recognize than the head and shoulders of a friend? It’s an odd question to start a trading article with but it’s meant place you into the mindset of how easy the recognition of this pattern can be. Identifying the Head & Shoulders reversal pattern on the chart will be just as easy to recognize as a dear friend once you’re finished with this article.

What Is A Reversal Pattern?
Reversal patterns appear after a trending market has lost its steam. Reversal patterns can be as simple as a trendline break or a little more complex like a Head & Shoulders pattern. Although reversal patterns often take a while to develop, once they are completed and the signal is generated you can find yourself on the front of a big move. What many traders enjoy about the Head & Shoulders pattern is the clear rules that follow entries and exits.

Learn Forex: Head & Shoulder and Inverted Head & Shoulders are Easy to Recognize & Powerful Too


Figure 1


Figure 2

How To Recognize The Pattern & What Does It Tell You About Potential Moves?
When viewing a price chart, a Head & Shoulders pattern will have the appearance of two shoulders and a head. In reality, you’re seeing three attempts or dives at a trend continuation that has failed. When three attempts of continuing a trend fail, then you can find yourself at the beginning stages of a reversing trend as the prior traders are likely exiting the trade as price is refusing to reach the new highs in an uptrend or lows in a down trend that they were expecting.

Why Should You Use The Head & Shoulders Pattern?
The Head & Shoulder pattern uses two simple concepts that any new trader can recognize. The two concepts are the three peaks with the middle peak being the greatest (the head) and the trendline which we call the neck line that offers a signal as to when we should enter the trade. The other benefit is that the Head & Shoulders Pattern can be used equally well in both up trending and down trending markets.

What Is The Difference Between The Bearish and Bullish Head & Shoulders Pattern?
The Bearish Head & Shoulders (Figure 1) pattern looks like a normal head and shoulders with the middle peak being the highest price and the trendline at the base of the pattern as our entry to sell if price breaks below. The Bullish Head & Shoulders (Figure 2) pattern is an inverted head & shoulder with the middle inverted peak being the lowest price with the trendline at the top of the pattern. The trendline or neck acts as our signal to buy should price break above.

How Do You Trade The Head & Shoulders Pattern?
The recommended method to trade this pattern is to wait for pattern completion and enter upon a break of the trendline or neck line. Once the neckline has been broken, you can set a stop exit order just below the neckline or preferably, above or below the previous shoulder depending on the direction. The reason for the shoulder based stop is that the pattern would be nullified if this point is broken and on the Head & Shoulder assumption, you would no longer want to be in the trade.

Learn Forex: EURUSD has completed an Inverted Head & Shoulders Pattern and could continue higher


(Chart created by Tyler Yell)

Closing Thoughts on Trading the Head & Shoulders Pattern
The Head & Shoulders reversal pattern is historically reliable and easy to recognize and should be utilized by new and experienced traders. You should wait to enter the trade until the pattern is completed with price breaking through the neckline. Once price breaks, you can expect a pull back so it is recommended to set your stop below the recent shoulder. Common profit targets are set at an equal distance from neckline to head and from neckline break in the direction of the reversal. However, you can set your profit target based on your goals and risk profile.

Happy Trading!

Attached Files:

Posted By harryshavers : 08 October, 2020
Related Article

Most of us would have taken vacations and planned trips at least once in their lifetime. The one thing that is essential to have a good memorable vacation is the plan made before the start of the journey. Most of us are also aware that planning is very important in all aspects of life, may it be personal or professional. Then why would Forex trading be any different.A successful forex trader would tell you that one of the reasons of his/her success is a forex trading plan. A good trading plan can make a difference between success or failure. Hence the significance of having a forex trading plan.   A good forex trading plan will help you identify your goals. As a forex trader it is very important to understand the extent you are going invest, have an idea about what the output should be. Another point is when to invest and where to invest. These are the basic questions that get answered when setting a goal.Now you have set your goals, next comes the preparation towards the journey. You will need to analyze the markets, understand the analysis given, and keep a track of the forex news and the forecast made. This is the second step towards becoming a successful trader. As in any plan, preparation is very important. This is where the hard work and minute attention to details come into play. The forex trading plan is as successful as the preparations and decisions made before the actual trading. The preparatory phase will give you the direction to take and when to take the position.Now, you are ready to start the journey of trading. All that can be done is done, it is your turn as a person to take the step forward. As in any adventure towards the unknown, the steps you take gives direction and the person you are, will again decide on the course of the journey. You need to be emotionally stable and decisive to be successful in the forex trading process. This is the most critical aspect of the whole process. You need to be calm and quick with your decisions or the opportunity slips away.A forex trading plan needs to give you profitability goals, determine the size of positions, the positions that need to be taken , manage the trade once the position has been taken and finally give the trader information that will help him or her be objective for selecting entry positions and exit positions.The forex trading plan can be simple or complex based on the amount of experience you have gathered in the trading market and the confidence you have gained. As any experienced traveler would tell you, the first journey is just the beginning, its only on repeated traveling will you start gaining the fruit of the travel. Similarly it is imperative to continue using the trading plan and over time you can fine tune it to reap the benefits. The forex trading is not feasible without a forex trading plan, hence its significance!

1. Start with the basics. It is very easy to say that in order to be a trader, you must first know the basic terms of the Forex market. On a regular basis, you will learn things slowly without any haste. Eliminate the thought of becoming a great sage by learning all the things together in one day. Take your time, don't get too excited.   2. Give up the thought of gaining quickly, learn to gain slowly by creating the experience. If you think that forex is the shortcut and the only way to get rich in less time then you are wrong. First, master the subject well and gain experience. The more time you spend on any career, not just Forex, the more you will benefit. What difference does it make if your friend makes 100 pips at the same time you make only a few pips at the same time? The difference is an experience! Your friend has been trading for the last 5 years and you have started those few days. Remember Forex is a career, not a scheme to get rich overnight.   3. Be an expert. At the beginning of learning, many people first look for experts, people think that if you get the shadow of an expert, you will become an expert in a short time, I am not completely denying that. But the latent desire to be an expert is one step towards becoming an expert. Another form of an expert is the result of your normal learning day by day. Because you can become an expert in the light of experience, so make your dream successful by counting your own experience. The expert's experience is completely his own. Until you cross that path on your own, it will only remain your dream.   4. Use your own analysis. Following another person blindly will make you blind. Your goal is to become a successful trader so analyze your own trades by mastering the analysis methods well. If you are able to trade in your own analysis, your analysis will make you a professional trader. If you follow a self-proclaimed guru like a blind man, how will you trade when the guru stops giving his tips? So be your own guru.   5. Demo The best of all is demo trading. Demo trading will help you catch the mistakes of your new trading and help you to give up bad habits in trading. Demo trades are superior to live trades from different brokers. The test of every trading method is a demo. If the demo success rate is good, use it in a live trade. Use the style you have in the demo first. Make the trades as you wish in the demo. Then select which strategies to use in real trade.   6. Learn from mistakes Take note of the success and failure of each test trade. Retire from the trade for some time (maybe more) in three consecutive failed trades. And give time again in the cold head after the break. Don't go live thinking about the success of the fourth time in the three times loss trading method. He started the analysis with the loss trades, where the mistake was, or why it didn't work properly. Find out the right reason and move on to the next trade.   7. Create good methods. Most new traders lose first. The reason is over-excitement, over-demand, and pre-trading ahead of time. So guys, without trading too much excitement, master the issues well first, gain experience and start trading at minimum risk. Before trading every time, check and check if the trading tool (strategy) is correct. Everything you expect from the trade, etc.   8. Stick to your own method. Every trading method has its pros and cons. No trading method is 100% profitable. There are 6 profits and 3 losses in 10 trades of your trading method, you are successful. In case your trading success rate may go down further, don't get frustrated or excited, update the strategy by understanding the market change, and stick to your strategy because only you know how fruitful your strategy is.   9. Think of everything simply. There is no reason to think that your trading is too difficult. Start in a simple way. You will see that it is really easy. Set aside time to trade at your convenience. Give less time but it should be effective. In other words, if you can't give more time, then just spend as much as you can for trading. If you want to start a new strategy, first think about it easily with time, analyze and fix it, make sure the results in the demo. And decide.   10. Trade-in a pair. Starting multiple trades at once does not put your own risk level and extra stress on your head. So choose only one pair for longer trading. Many currencies may seem suitable for trading together, but trade with the currency pair that you have a good idea about. If you trade with 4-5 pairs at a time, you will not be able to understand the character of any pair well. And become misguided and eventually lose the trade.   11. Trade within a certain timeframe. Practice trading in a specific timeframe, as there are many advantages to trading in a single timeframe, such as trading in a single timeframe where you can concentrate where multiple timeframes can confuse you. A timeframe will help you analyze and make proper decisions, because the same chart will start different analyzes in different timeframes, so trading in a timeframe is very important, especially for beginners.   12. Keep trading charts clear. Many new traders think that it is better to have more indicators on the chart, but this is not the case. It is not wise to trade the chart randomly with more than 2-3 indicators on the chart. Understand the 3 indicators and characters and finalize in the light of experience. Basically the use of indicators in trade is not mandatory for you, it is only used to smooth your trading decision. Because there are many traders who are trading at 80% without using any indicator. I am not telling you to trade by removing all the indicators, if you want to be a good trader, you also need to use 2-3 indicators in the first stage. Understand the support and resistance lines for better trading.

Anyone who starts trading forex immediately realizes that there are a lot of factors involved and that a trader has to look at them all. The Forex Trading Plan helps you to make sure that you’ve left nothing out, and that you are pursuing your trading according to the strategy you want to use.     It’s surprisingly easy, when trading forex, to get caught up in the heat of the moment, to go off strategy, and to start making mistakes. Forex trading can be excruciatingly slow, but it is also devastatingly rapid. When making decisions, it’s good to know that you have the full weight of your experience and know-how behind you.   This is what a forex trading plan offers you, and, although it is tedious work completing it every day you trade, you will find the effort well worthwhile.   What goes in the Forex Trading Plan? A forex trading plan has two parts: A journal and the plan itself.   The journal is the easy part of the trading plan. In it, you log your trades with all the relevant information – time, date, amount, currency pair, and – this is very important – the strategy behind the trade. If you based your trade on a technical pattern, then, win or lose, explain what you tried to do and what happened. It doesn’t even require full sentences, just a few words like, ‘noted reverse triangle pattern, went long in euros’ or whatever the primary reasons behind your move were.   The trading journal is an enormously supportive tool, because, while you are analyzing the market and planning trades, you will, again and again, see patterns that you’ve described in your journal. When you see a winning pattern check in your journal how the last trade based on that pattern turned out, each time you will hone your strategy, noting more and more relevant points so that you win more trades.   Yes, there is software available to make a trading journal. Some of the software supports importing charts and records from your broker; others have specific metrics and even trading algorithms. Choose an app that fits your personality and style.   The trading plan is about strategy and risk management The trading journal covers day-to-day activities, but the trading plan has a long-term outlook.   As its name suggests, the trading plan is about what you plan to do with your trading, and how you plan to do it. It brings together the different elements of your strategy, so that, before you make a trading decision, you can be sure that you have based it on the right factors.   The plan is an evolving document: Every day you write about what you did, why, and how it all worked out. Then you add what you plan to do the next day, based on what market conditions. At the end of the trading day, you discuss results and analyze what happened.   Why write all this down? Because you are certain, in this way, to forget nothing and to learn from your mistakes.   But the most crucial point of a trading plan is that it helps you rein in your emotions. Every trader gets angry when losing, or too confident when winning. The forex trading plan will remind you to stick to your strategy, and to not make foolish emotional decisions – these can be a trader’s worst enemy.   This writer, for example, tended to get mad when losing and to jump back into a trade too fast. When I started keeping a journal, and I was tempted to trade on my emotions, I would look back to the last (disastrous) time I did this, and the reminder often saved me from expensive mistakes.   Use a Checklist Many traders include a checklist in the trading plan. Make a list of what market conditions are relevant to your trading, what factors are behind your trades based on your strategy, and then go over the list when analyzing the market and getting ready to commit your funds.   Some people make the whole trading plan into a checklist, but this leaves out much of your thinking and feeling, and you want to get those on paper to understand more and control yourself better.   The plan should also include a long-term evaluation of your trading – perhaps it’s good to do this at the end of the trading week. What are your goals at this point? How have they changed from when you started trading? Do you feel satisfied with your success, and if not, why not?   All of this will burn into your brain the elements you need for success, and hone your strategy so that you don’t keep making the same mistakes. It’s tedious and time-consuming, but when you start seeing the profits roll in, you’ll understand why serious professional traders always keep a journal and a forex trading plan.

Post your comment