Chart patterns are very important in forex trading. Among many chart patterns, Head and Shoulder chart pattern is very much popular to the forex trader. This pattern is also a “trend reversal pattern“which creates the unique opportunity to ride a new trade from the very beginning.
Let’s see an example of Head and shoulder pattern
Figure: Head and shoulder pattern formed in an uptrend. End of uptrend
Pattern formation and confirmation
- Price forms a peak in the left t shoulder and then again decline
- Price again rises up for the last time and reach the highest peak and again decline
- The price makes the third and last final attempt but eventually declines to form the right shoulder.
- A neckline can be drawn from recent swing low of two shoulders and head.
- A perfect break of the neckline confirms the formation of pattern and trend reversal
Trading the pattern
The trader waits patiently after identifying the head and shoulder in an uptrend. The clear break of the neckline initiates the sell signal. Since it’s a trend reversal trading system trader must be extremely careful about the formation pattern and breaking of the neckline. Trader can wait for the price to retrace back in the neckline to enter into a trade or can directly trade the breakout
Stop loss and take profit
A stop loss should be placed just above the neckline while trading this pattern. Some trader prefers to put their stop loss just above the right shoulder of the pattern. Take profit level varies from trader to trader while trading the reversal pattern. Most trader rides the new trade until the momentum fades out or it faces a major support level. Though it’s an extremely reliable and profitable forex trading pattern, the trader must use proper money management while taking any trade.
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