Forex head and shoulders pattern

Forex Head and Shoulders Pattern:

Forex head and shoulders is a technical pattern that resembles the two shoulders and the head of a humanbeing. This is a bearish pattern. This indicates a reversal after an upward trend. This is a more common pattern in long term trends. The head and shoulder pattern consists of three peaks of price movement. The middle peak is higher than the left and right peaks.

In the following picture a head and shoulders pattern is shown. The line drawn connecting the low points of the pattern is called neck line.

Forex head and shoulders

Trade entry:

when you see a head and shoulders format, wait until the neck line is broken with a strong candlestick. A strong candlestick means a candlestick which has a large body compared to the tails. In the following picture the neck line is broken by a strong candlestick body and moreover the candlestick does not have long tails so it is a very good opportunity to enter a short trade.

Forex head and shoulders pattern broken by strong candlestick body

If the neck line is broken by the tail of a canldestick and not by the body of the candlesick then do not enter the trade. Check the following picture. In the following picture the neck line is broken by the tail of the candlestick and not by the body of the candlestick and moreover the candlestick has long tail. So do no enter the trade.

Forex head and shoulders pattern broken by candlestick tail

Stop loss and take profit:

Once the break out occurs enter a short trade. Measure the difference between top of head and neck line. Breakout should be same as the difference. Set stop above neckline. Set target(limit) for less than the difference between head and neckline.

Check the following picture. In the following picture the difference between the neck line and the top of the head is 70 pips. So the break out is 70 pips. But once the break out occurs the candlestick penetrated downwards for around 15 pips. So the remaining profit potential is 55 pips. Since we have to use the profit target a little less than the actual, use it around 5 pips above the actual target. So the remaining profit target is 50 pips.

Take profit and stop loss