If you have watched my forex trading signals that is specially done for readers of this blog, you will have seen the power of the head and shoulder at work for a few times.
Therefore in today forex candlestick tutorial, I shall be sharing with you my knowledge about the head and shoulder pattern so that you can make use of it in your trading.
What Is The Head and Shoulder Pattern
The head and shoulder pattern is in fact a reversal candlestick pattern. It is only applicable when you are in a strong trend. If you see the pattern forming in a flat and trend less market, it is of no use.
However when you see the pattern forming on a strong up or down trend, you should be aware of the possibility of a reversal. This does not mean that a head and shoulder on a strong trend MUST comes with a reversal, it is just a sign that the possibility is there. You need to have other verification from other indicators to confirm that.
How Does It Look Like
From the picture above, you will see the forming of a left shoulder, a head and a right shoulder.
How To Trade This Pattern
When you see the formation of the head and shoulder pattern, you should start by drawing the neckline which is the support for a top head and shoulder pattern or a resistance for a bottom head and shoulder pattern.
When you see the price breaking the neckline, this gives you a good entry signal. You can place your stop loss 20 to 30 pips above the breaking point of the neckline.
As for the target profit, you should do the following price projection
You should measure the vertical distance of the head to the neckline and then project the same distance from the point of breakout and you will have the target profit.
The price projection works most of the time but there are also times where the price moves half way and then reverse as it has hit a major support or resistance.
I hope that this information is useful for your trading. Do give your views or ask your question by commenting below.
By the way, this pattern works for all currency pairs and all time frames.