1/29/2019 YouFOREX Brasil - Head & Shoulders

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HEAD & SHOULDERS

 
Head and Shoulders consists of a high peak in the middle and two double peaks on either side of that one as can
be seen in the illustration below. The higher peak is the head and the other two lower ones are the shoulders. Head
and shoulders patterns are relevant when the neckline is broken. Once the neckline is broken, we may look to open
the trade on the opposite side of the head and shoulders, which means we have to sell. Some traders enter
immediately and some prefer to enter on a pullback and the retest of the neckline. The latter option is safer
because now we know that this is not just a fake-out. The amount of pips targeted in this strategy is the same as
the amount of pips between the top of the head and the neckline.
 
Once the neckline has been broken through it would signal a reversal in trends and in the case above you would go
short.
 
Following on from the break it has dropped back and then tested the neckline and resumed it direct downwards.

Head and shoulder patterns are not very clear, don’t expect the real charts to be perfectly clean and symmetrical,
they will provide more of a challenge. To be able to trade these patterns we have to spot them on real time charts
as they happen and not after they are no longer relevant.

The bottom line, which is called the neckline and is actually a support level, might not always be a straight line. It
might be an ascending or descending line, which makes it much more di cult to spot.

Inverse Head and Shoulders

This is the mirror image of the normal head and shoulders where the head is the lowest point and a break through
the neckline would signal a BUY.

Below shows and incomplete head and shoulders pattern. The neckline was not broken so the signal has not been
triggered. This is an example of to show that evolving head and shoulders patterns will not be clean and clear and
can make it di cult to spot. This is why some prefer to enter on a pullback and the retest of the neckline. This

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1/29/2019 YouFOREX Brasil - Head & Shoulders

option is safer because now we know that this is not just a fake-out and again can be used in conjunction with
other analysis tools.
 

Now lets look at what each of the number from 1 to 7 on the head and shoulders pattern above mean. Firstly, the
market has be in a downtrend for some time:
 
1. buyers come in at the low (left shoulder) and push the price up (which results in a beginning neckline).
2. What happens next is that sellers soon return to the market and push prices to new lows(the inverted head).
3. However, the new low (head) is not sustained as price rises back up due to buyers pushing price up to create a
continuing neckline.
4. Then sellers  enter again pushing the price down  to a low, but this  low does not exceed the previous  low (the
head). This low is the right shoulder.
5. Buyers get in and push the price up and this time the neckline is intersected to the upside.
6. Seller may get in here and push price down to test the neckline that was intersected which would now act as a
support line.
7. Buyers get in push the price up-now an uptrend in “o cially’ in progress!
 
HOW TO TRADE THE INVERSE HEAD AND SHOULDERS  PATTERN
 
There are two options on how you can trade the inverse head and shoulders pattern:
Option 1:
1. Wait for a candlestick to break the neckline to the upside.
2. Then place a buy stop order just a few pips (3-5 pips at least) above the high of the candlestick the intersects
the neckline.
3. Place you stop loss 3-5 pips below the low of the right shoulder.
 
Option 2:
1. Once price breaks the neckline, just wait for price to pull back down to touch the neckline which it intersected.
This intersected neckline would now act as a support line.
2. Once it touches the neckline, place a buy stop order 3-5 pips above the high of the candlestick that touches the
neckline.
3. Place you stop loss anywhere from 10-50 pips(depending on which timeframe you are trading in) just  below
where your buy stop order is placed.
4. Try to use  the bullish  reversal candlestick patterns  (click the link to check it out) as your short entry
con rmation on this option 2 entry style.
 
WHERE TO PLACE YOU TAKE PROFIT TARGET
 
Here are a couple of options:
1. Take pro t option 1 is to  3 times the amount you risked in pips.
2. A second option would be see a previous swing high point where price moved down from, and use that level as
your take pro t target.

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