Head and Shoulder Chart pattern

HEAD AND SHOULDERS CHART PATTERN

head shoulder

This pattern is considered as a reliable trend reversal chart formation pattern. It is also known as head and shoulders top. It is generally found after an uptrend or downtrend.

They are classified into two types:

A. Standard head and shoulders pattern: Indicates a possible downward move after an uptrend.

B. Inverse head and shoulders pattern: Indicates a potential upward move after a downtrend.

Let’s discuss the standard pattern and how to use it for possible selling opportunities.

How do we Identify the standard head and shoulders pattern?

This pattern arrives after an uptrend and signals a possible reversal to the downside. It is identified by the following:

A. Left shoulder

B. Head

C. Right shoulder

D. Neckline

Find below the illustration of a Head & shoulders pattern:

head shoulder

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Practice session

Exercise 1: Identify the head and shoulders pattern. Show exercise

Exercise 2: Identify the head and shoulders pattern. Show exercise

There are to two techniques that can be adopted for trading standard head and shoulders pattern.

Technique 1:

When we identify a head and shoulders pattern in an uptrend and the right shoulder has been completed, we can consider to “Enter a sell order when the price breaks through the neckline”. In order to prevent “false breakout”, wait for a candle to close below the neckline before entering the market.

head shoulder

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Entry -1 Short entry

Stop loss -2 Stop loss above the high of the right shoulder.

Calculation of take profit level: Measurement of the distance between the head and the neckline of the pattern, and then placing the target the same distance from the neckline in the direction of the breakout.

head shoulder

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Number 5 Height of head to neckline in (Red).

Number 6 Same height as the head to the neckline in (Red).

Sell Entry-1 Short entry

Stop loss -2 Stop loss

Target Place -3 Take profit level – distance between neckline and take profit is the same distance as neckline to the top of the head.

Practice session:

How to place entry, stop loss and take profit according to TECHNIQUE 1 in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Technique 2

“Wait for the price to break below the neckline” (broken support) as in the first illustration.

Look to place a sell order on the retest of the neckline (broken support is now treated as resistance).

The illustration for trading using technique 2 is provided below:

Number 1 First shoulder

number 2 Head

number 3 Second shoulder

number 4 Neckline

1- Short entry

2- Stop loss, place above the new resistance level.

The profit target would remain unchanged as in the first technique, where we measure the distance of the head to the neckline and then place the profit target the same distance away, down from the neckline.

head shoulder

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Number 5 Height of the head to the neckline in (Red).

Number 6 Same height as the distance from the head to the neckline in (Red).

1 Short entry

2 Stop loss<./p>

3 Take profit level

Practice Session:

Where to place your entry, stop loss and take profit levels in accordance with technique 2 in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Nut shell

An overview of the lesson discussed so far:

The Standard head and shoulders is a bearish reversal pattern that arrives after an uptrend and signals a possible reversal to the downside.

There are two techniques that can be adopted to trade this pattern and look into possible selling opportunities.

Technique 1 suggests:

Wait for a candle to break through and close below the neckline.

The stop Loss would go above the right shoulder.

The profit target would go the same distance as the head to the neckline, down from the neckline.

Technique 2 suggests:

Wait for the price to break through the neckline and then wait until it retests the neckline as resistance.

The stop loss would go above the resistance level

The profit target would be placed the same distance down from the neckline, as the height of the head to the neckline.