Head and Shoulders

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Head and Shoulders

A Head and shoul

ders pattern is generally one of the surest patterns that are developed by price action. The reasoning behind its name is that the pattern looks like a head with a shoulder on either side.

In the above example there are four parts to the formation identified.
1.    Shoulder 1: First turn back of price on the move up.
2.    Head: Second turn back from prices higher than the high of Shoulder 1
3.    Shoulder 2: third failure of price to get higher , lower than the Head
4.    Neckline; lowest price on the three pullbacks form the head and shoulders.

Trading it though, requires patience and planning. In the example above the trader would need to wait for the neckline to be broken before even considering a trade. However at the point the trader has very specific profit and stop loss targets. In the following example, when/if price finally closes below the neckline; a short trade would be initiated. The profit target would be a distance equal to the distance between the neckline and the top of the head. This target often coincides with previous support and resistance points.
The stop loss would be just above the very right hand shoulder. In this example the trade was not initiated because the neckline provided support and price bounced off of this line.

Comments

Comments

Sam - Online Forex Trading Course

|71.165.127.xxx |2010-08-21 12:21:29

Very good intro to the head and shoulders pattern.. I will share this and the
site with my students..

Thanks again

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