Trading The Forex Head And Shoulders Pattern – When it comes to chart patterns in Forex trading, the Head and Calders pattern is one of the most reliable and most profitable chart patterns in the Forex market.
But instead from this blog post, you are going to learn how to use the head and shoulders pattern to trade trade reversals so that you can catch the trend in the early stages and hopefully make a good return like the trade below. do
Trading The Forex Head And Shoulders Pattern
Okay, before trading like above let’s get a brief idea about the head and shoulder pattern and how it works in the forex market.
Inverse Head And Shoulders Pattern Trading Strategy Guide
A head and shoulders pattern is a chart pattern in the forex market that consists of three swing points, two outer swing points with a middle swing.
Usually the two outer swings are called the left shoulder and the right shoulder and the middle one is called the head which is the most swinging point in the head and shoulders pattern and finally there is a neck line which is the base for the swing. Works as a line.
The Head and Shoulders pattern is a reversal pattern which means as currency traders we want to trade this pattern after a bullish price move.
Also keep in mind that, to confirm the head and shoulders pattern or to trade this chart pattern, the price must close below the neckline.
Most Commonly Used Forex Chart Patterns
The opposite of this pattern is called inverse head and shoulders. An inverse head and shoulders pattern often occurs when the underlying trend reverses. See the chart below.
When reading a forex chart, we come across many price movements and chart patterns that are full of insightful market messages and indicators.
However, the head and shoulder pattern is easy to spot and making trading decisions based on this chart pattern is easy and objective.
When buyers lose their control over the market, a head and shoulders pattern occurs. If you see a scenario like this in an uptrend, it’s best to prepare for a trend reversal.
Head And Shoulders Pattern Trading Strategy Guide
On the left side of the chart, you can see that it is a clear uptrend. Each time the price made a new high and another new high. But instead of making a new high after the head, price made a lower high and that caused a head and shoulders pattern in an uptrend.
Answer – It is not a chart pattern that turns trending markets into reversals. This transaction is being done between buyers and sellers. The head and shoulders pattern is just the result of this process.
Let’s take a real forex chart with a real head and shoulders pattern to see what it’s saying?
This is the same chart we used earlier. You can see that the price from the left was in a strong uptrend until the occurrence of the head and shoulders pattern.
Head And Shoulder Chart Pattern
At that point forward buyers were unable to make new highs, instead, the price began to make further lows and eventually formed a head and shoulders pattern.
Price broke the neck. Not only that, but the price also hit a new low. This confirms that the sellers are now in control and a possible trend reversal could be here.
The head and shoulders reversal pattern does not work because of the chart pattern. This works because of the way buyers and sellers in the up-trading scenario.
Okay, so far you have learned how to spot head and shoulders patterns and now you know how to read the hidden story behind head and shoulders patterns.
The 9 Best Forex Chart Patterns
In the world of forex trading, many traders come with chart patterns such as double tops and bottoms, triangle patterns and the top and shoulders pattern that we have talked about so far.
But many traders, especially new forex traders use these chart patterns themselves or in other words, these new traders trade these patterns in unfavorable market conditions and finally, they blame the patterns without understanding the real reason. They do
If you don’t use this model in no man’s land, you can’t get the most out of this model.
A trend reversal can be up or down. On the uptrend, a reversal will occur to the downside. On a downtrend, a trend reversal will occur on the upside.
Top 10 Chart Patterns Every Trader Needs To Know
As I said above to get the most out of any chart pattern we have to combine it with the right market conditions.
For head and shoulder patterns, we are focusing on ongoing trend reversals which means trading the head and shoulders pattern should be our first criterion for a trending market.
In this article, we are going to talk about two trade entry techniques, which help in getting a favorable reward to risk ratio regardless of the market conditions.
As we already know, we only trade the head and shoulders pattern after the price breaks below the green line. That is our entry point.
Head And Shoulders Trading Patterns
Sometimes the price breaks the neck with great speed. In such cases, we may direct our trade orders. Because we know that the market momentum is in our favor.
Let’s take an example to see how it works. Take a look at the AUDJPY 2-hour chart below.
If you look to the left first, we can see that AUDJPY was in a nice uptrend for quite some time.
But the question is when and how to enter the trade? In Forex terms, we call it trading time.
Head & Shoulders Pattern: What Is Mean In Forex?
In this scenario, we are trying to place a sell order if the price breaks below the neckline very strongly, which means we only place our trade if the price breaks below the neckline.
Take a look at the red circle marked in the AUDJPY chart above. It is a strong breakout of the neck and thus the breakout shows the aggressiveness of the sellers.
Let’s take another trading example to illustrate this first trade entry technique before going into the second trade entry technique.
As in the previous example, EURUSD was in a trending position for some time. But this time, it is a downtrend.
How To Trade The Inverse Head And Shoulders Pattern
Since we have the head and shoulders pattern matching the correct market conditions, now is a good time to look for trades.
According to the EURUSD 4-hour chart above, we can see that the price broke strongly above the neck (marked by the red circle in the chart) which indicates buying pressure.
EURUSD turned into a strong uptrend. See, if you were long after the strong breakout you would have been given a nice profit. right.
As you guys have seen, strong breakouts often provide us with good return trading opportunities.
How To Trade The ‘head And Shoulders’ Forex Chart Pattern?
The forex market is full of many uncertainties so we can’t find a strong breakout every time.
Simply we wait for a break of the green line and then wait for the price to push back to the neckline and retest it.
At a glance, we can see that the EURUSD was in a downtrend for some time and then the occurrence of the head and shoulders pattern indicates the weakness of the ongoing downtrend.
In the EURUSD chart above, we can see that the initial breakout is not clear so we wait for a retest of the green line (second red circle).
The Head And Shoulders Pattern: How To Spot And Apply It
Similarly you can re-enter a reversal trade using a break and retest pattern if you find an unclear break of the green line.
OK, now you are familiar with two trade entry techniques used to enter reversal trades using head and shoulders patterns.
So managing your risk is very important if you really want to be a consistently profitable forex trader.
Or structure levels are the levels on any forex chart that attract the most attention. Which means that these levels often lead to price bounces, therefore, placing a stop-loss order a few pips above or below (depending on the scenario) is a good idea to limit your downside.
Chart Patterns: The Head And Shoulders Pattern
According to the above USDCAD 4-hour chart, we can see that the head and shoulders pattern shows the weakness of the ongoing uptrend and after the break of the neck we can confirm the reversal of the trend.
In this case, the right shoulder is the recent structural level, so placing the stop-loss order a few pips above the right shoulder is the safest option here. (Take a look at the chart above)
See, after identifying the most recent structural level, it is a matter of placing a stop-loss order. That’s it.
Or, if we struggle to achieve a favorable reward to risk ratio by selecting stop-loss orders using structural levels.
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Take a look at the neck stiffness. This breakout candle is very strong and very familiar from the neck.
If we look at this situation in terms of risk to reward ratio, placing a stop-loss order at the structural level (as we did earlier) is not a good idea, right?
So, we can go for the second option which is using the moving average to eliminate the stop loss.
According to the chart above, we placed a stop-loss order a few pips below the 21-period moving average (see chart above) which is a safe place to cut our losses. Not only that by using this method we were also able to obtain a favorable risk to reward ratio.
Head And Shoulder Pattern Trading Strategy
But finding a safe market level
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