Head and Shoulders Pattern - Recommendations about the OrdersMonday, 3 July 2017 20:17
Head and shoulders is a pattern of graphical analysis of the Forex market, which indicates a rapid turn of the trend. This pattern is often used by experienced traders, since it helps to assess the situation on the market quickly, and to open the profitable trades.
As a rule, the head and shoulders appear on the chart at the end of a long trend. After the figure is formed, the trend turns, or a rollback occurs.
The figure looks as follows:
Just like with other figures of graphic analysis, the success of trading depends entirely on how accurately the trader determines the pattern on the chart. To recognize it among the other formations, you need to remember the basic rules.
- There should be a strong trend in the asset movement.
- First, a shoulder appears, that forms the maximum point. Then a hollow forms.
- The head forms a new maximum point.
- The second shoulder appears after the new hollow. There is the maximum below the head, which coincides with the level of the first shoulder.
- In case of a bullish trend, the second hollow may be higher than the first one. It may be lower, in case of a bearish tendency.
The neckline serves as a support level. Once the price breaks it, the trader should consider the pattern formed and open the position.
Opening the Positions
A trader should also enter the market according to certain rules. Consider opening a sell order.
- The chart should have a pronounced upward trend, after which the Head and shoulders is formed.
- The value of the asset should break through the neck from top to bottom and close below this level.
The Stop Loss is set above the second shoulder. The level for setting the order depends on the volatility. Don’t forget to follow the rules of money management.
The Take Profit level should be twice bigger than the distance between the top of the head and the neck line. After the value of the asset passes this mark, we suggest you to close a part of the transaction and set the rest to the breakeven. Next, use the trailing stop.
You can also open the purchase positions within the following conditions:
- The price chart should have a pronounced bearish trend, after which the Head and shoulders appear.
- The price chart should break the neck from the bottom to top and close above this level.
In this case, the Stop Loss is placed under the second shoulder. Also, don’t forget to follow the risk management rules and check the market volatility.
The Take Profit should be bigger than the distance between the lower price of the head and the neckline. Like in case of a sale, after the price has passed this segment, it’s better to close the deal partly, and then follow the position with a trailing stop.
It is best to look for such a pattern on the older timeframes, which allows you to ignore much noise.
To avoid risks, don’t use the graphical analysis figures as the only trading signal. Always filter such data. For example, this method is well combined with resistance and support lines, price channels, etc.
Before you start trading based on the graphical analysis, practice on demo accounts first. Then you will learn how to recognize the patterns correctly, as well as how to apply your skills with benefits.