How to trade head and shoulder shapes

Today, I want to tell youstep by stepHow to trade the head, shoulders, and top shape.
In fact, I even exchanged a few examples that you will see.

I should point out one point:
thisNot onlyIt is a guide for advanced traders. I firmly believe that things should be simple.
Therefore, whether you are just starting out or an experienced professional, you will love this guide.
Let's get started.

[li][backcolor=0px 0px]The attributes of head and shoulder patterns[/table][backcolor=0px 0px]step1: Upward trend[/table][/li][li][backcolor=0px 0px]step2: Left shoulder[/table][/li][li][backcolor=0px 0px]step3: Head[/table][/li][li][backcolor=0px 0px]step4: Right shoulder[/table][/li][li][backcolor=0px 0px]step5: Neckline[/table][/li]

[backcolor=0px 0px]What causes the formation of the head and shoulders?[/table][backcolor=0px 0px]Head and shoulder breakout[/table][backcolor=0px 0px]How to break through collar support[/table]

[li][backcolor=0px 0px]Input Method #1[/table][/li][li][backcolor=0px 0px]Input method2[/table][/li]

[backcolor=0px 0px]Stop loss placement and risk control[/table]

[li][backcolor=0px 0px]Stop loss placement #1[/table][/li][li][backcolor=0px 0px]Stop loss placement #2[/table][/li][li][backcolor=0px 0px]Exit when closed (safety net)[/table][/li]

[backcolor=0px 0px]Head and shoulder targets[/table]

[li][backcolor=0px 0px]method1[/table][/li][li][backcolor=0px 0px]Method #2[/table][/li]

[backcolor=0px 0px]A few examples[/table][backcolor=0px 0px]Key insights before departure[/table][backcolor=0px 0px]The final words[/table]


The attributes of head and shoulder patterns


Before conducting a transaction, it is necessary to first understand the key attributes of the pattern. This way, you can easily find the most advantageous head and shoulders.

obtain  [backcolor=0px 0px][backcolor=0px 0px]Instant access[/table][/table]To the same "New York closure"foreign exchangeChart used by Justin Bennett!

[backcolor=0px 0px][backcolor=0px 0px]Download Now[/table][/table]Let's start from the following picture.

From the above figure, it can be seen that the head and shoulder patterns have five attributes.
In the order of occurrence, they are:

[li]Upward trend[/li][li]Left shoulder[/li][li]head[/li][li]Right shoulder[/li][li]Neckline[/li]

Please note that I have placed the "collar" at the end. At first, this seemed to be a mistake.
However, before determining the neckline, we need the shoulders and head of the pattern. If this sounds confusing, please don't worry. As the course progresses, this will become more meaningful.






Exclusive bonus: [backcolor=0px 0px][backcolor=0px 0px]downloadHead and Shoulders PDFMemo sheet[/table][/table]It will show you everything you need to profit from this reversal mode.

Now let's discuss each step in more detail.



step1: Upward trend

The first part of the head and shoulder shape is an upward trend. This is an extended increase, ultimately leading to fatigue.
Usually, the longer the duration of an upward trend, the greater the likelihood of a reversal.



step2: Left shoulder

The market downturn forms a higher low point. At this point, things are beginning to merge together, but we are not yet enough to attract people's attention.



step3: Head

Now the left shoulder has been formed, and the market has reached a higher point, forming a head. However, despite being optimistic about a rebound, homebuyers cannot make a decisionEssentiallyHigher and lower.
At this point, we have the left shoulder and head of the structure. The neckline is also starting to take shape, but we need the right shoulder before we can draw the neckline on the chart.



step4: Right shoulder

The right shoulder is where everything blends together. This indicates that buyers are getting tired and the market may be preparing for a reversal.
At the beginning of the right shoulder, we are enough to start drawing the neckline. However, since the pattern has not yet been completed, it is best to consider it as a draft rather than the final version.



step5: Neckline

Now we have a definite head and two shoulders, and we can get support from the neck line. When we explore how to trade breakthroughs, this level will become a key component.
The leader's mouth is regarded as the boundary between the buyer and the seller.



What causes the formation of the head and shoulders?


All price actions come with news. Some messages are easier to read than others, but they always exist.
Regarding the head and shoulder shape, the information is that the buyer is very tired, and it is best for you to be prepared for potential reversals.
But what are the patterns that lead to market reversal? How can several simple swinging high points achieve this?

These can help you understand clues and take you to higher levels of questions.
But there is one issue
My way of expressing the above two questions failed to capture the essence of the head and shoulder shape.
You will see that it is not the price structure itself that causes the market to reverse. This isBetween buyer and selleroftransition. The pattern is only the result or byproduct of the process.
To better explain things, let's approach them from different perspectives. For this, we will useGBPJPYThe actual head and shoulder shape that appears on the weekly chart.

Please note that after cutting out a higher position (head) and pulling it backwards, the buyer cannot push the price back above the head. Finally, it forms the right shoulder.
If you areGBPJPYBulls, then a lower high point will be a big signal.
Let's take another look at the same oneGBPJPYChart.

If you still remember in this lesson[backcolor=0px 0px]How to determine trend intensity[/table][backcolor=0px 0px]The obvious sign of an impending trend change is a shift in the order of high and low.[/table]
For example, a market that has been constantly cutting between higher highs and lower lows may encounter trouble with a single low point.
However, until we reach a lower high pointandUntil a lower low point, the trend will not be broken technically. Please note how the price trend within the second red circle above eliminated the last low point of oscillation.
Once it falls below this low point,GBPJPYIt implies that the buyer is in trouble.
Due to the pattern itself, the reversal of the head and shoulders does not work. It works because the high and low points develop and interact with each other at the top of an upward trend.
Always remember to keep it simple. What we are doing here is simply throughPay attention to the relationship between high and low pointsTo identify potential changes in trends.



Head and shoulder breakout


The important thing to remember about the pattern of the head and shoulders is that it can only be confirmed when the collar is resting.
Breaking, what I meanIt closes below it。
Foreign exchange transactionsA common mistake among them is to assume that the shape has been completed once the right shoulder is formed.
Actually, it only hasClosing below the neckline in the marketOnly when is complete can transactions be made.

Please note that in the above picture, the market has already fallen below the collar. This confirms the shape of the head and shoulders and sends a breakthrough signal.






Expert tip:If you are on a daily chart, you need to wait for the daily closing price below the neckline before considering input.

Now, let's go back to ourGBPJPYIn the example of head and shoulder shape, check where the confirmation was made.

Please note how the daily closing price below the neck support level constitutes aDeterminedBreakthrough. Although previous meetings have approached breaking levels, they have never actually closed below support levels.
Next, we will discuss several entry methods for trading heads and shoulders.



How to break through collar support


So far in this course, we have covered five attributes of the head and shoulder pattern. We also discussed how to distinguish between structures that are still intact and those that have already been damaged.
Starting nowrealInteresting parts-How to trade, of course, also to profit from the reversal of the head and shoulders.
There are two ways to approach breakthroughs. The first method is to short below the neckline using hanging orders. Please note that those who use this methodNoWaiting for the market to close below the lead.
The problem with this method is that you[backcolor=0px 0px]Maybe[/table][backcolor=0px 0px]suffer[backcolor=0px 0px]Wrong rest[/table][backcolor=0px 0px]of[/table][backcolor=0px 0px]possibility[/table][backcolor=0px 0px]。[/table][backcolor=0px 0px]You usually see a trading pair fall below support level during the trading session, and then fall below support level in the afternoon Eastern Time in the United States5The closing price rebounded before midnight.[/table][/table]
This takes us to the second method, which I prefer. This method involves waiting for the daily closing before considering entering the neckline.
By doing so, you can reduce the risk of the market regaining its leading position and prevent your losses.
Therefore, we will only focus on the second method. However, even if waiting for the market to close below the lead, there are two entry methods to consider.
Let's discuss each in detail.



Input Method #1

The first way to enter the head and shoulders breakthrough is to sell immediately when the closing price is below the support level.
For example, due to our analysis within a daily time frameGBPJPYTherefore, we will wait for the daily closing below the neckline. That will be us[backcolor=0px 0px]Short selling[/table][backcolor=0px 0px]The signal of (selling).[/table]
The appearance is as follows:

Please note how we will short once the currency pair closes below collar support.



Input method2

Although the above methods have their uses, I usually prefer to wait for the collar to be retested as a new resistance.
This leads us to the second input method.

Please note that the second entry method is to wait for the collar to be retested as a new resistance.
This accomplished two things:

[li]It helps to verify the recent rest time[/li][li]It provides more[backcolor=0px 0px]Favorable risk return rate[/table][/li]

That's why I almost always choose the second method. Of course, the opportunity to miss an entry due to waiting is greater, but the potential return on doing so is equally enormous.



Stop loss placement and risk control


Although simple and straightforward, setting a stop loss at the head and shoulders of trading is still a controversial topic. Some traders tend to set stop losses above their right shoulder, while others choose more aggressive positions.
Just like everything you do in the foreign exchange market, it depends on what is most suitable for you.
Nevertheless, I tend to believe that there are too many stops above the right shoulder. It unnecessarily and negatively impacts your risk return rate.
That's why...
Confirm that the head and neck are below the neckline, right? Therefore, returning the closing price above the same level will negate this pattern.
Now, assuming my stop loss is above my right shoulder, if the closing price returns above the collar, do I have to wait for the market to take me out of the market?
Of course not.
Therefore, if the situation worsens, there are indeedThree typesThe method of exiting the transaction. Let's start from the first one, which in my opinion is a less attractive way, and then we will summarize my two favorites.



Stop loss placement #1

The first area where you can set a stop loss is above the right shoulder.

Please note how this option provides sufficient space between your entry and stop loss.
However, this may not necessarily be a good thing. I even think itDisadvantages outweigh benefits. You will find that such a high stop loss means you have cut your potential profits by half or even worse.
stayGBPJPYIn the case of mode, the next goal we need to reach is below the breakthrough point1800Point. If you choose this first option to[backcolor=0px 0px]Setting risks[/table][backcolor=0px 0px]Means you will have500Stop loss of points. If it is divided into goals, it can be concluded that3.6R。[/table]
Great, but let's take a look at using itsectionWhat can be obtained from the options.



Stop loss placement #2

This is me[backcolor=0px 0px]Preferred stop loss position[/table][backcolor=0px 0px]. It provides a better risk return rate while still allowing me to "hide" stop losses.[/table]
This isGBPJPYThe appearance on the chart:

Please note that I will place the stop loss above the last swing high point. I'm still short of my introductory book200Point, so it is hidden, but not far apart and will not have a negative impact on my potential rewards.
If you are willing, you can always be more strict, as it all depends on your trading style. Just remember, the closer the stop loss is to your entry point, the greater the chance of premature exit from trading.
Do you remember the first stop loss placed above3.6RIs it profit?
By setting the stop loss above the last high position, you have shifted the stop loss distance from500Point lowered to200Point. with1800Point as the goal, this is a very considerable sum of money9R。
In hypothetical terms, this is7.2%The profit is18%Assuming that you have taken on the account balance in the transaction2%Risk.



Exit when closed (safety net)

I call this a safety net. Because closing the mouth above the neckline every day indicates ineffectiveness. And I don't know you, but I would rather lose money50Ideas rather than losses100Ideas.
Refer to the aboveGBPJPYFor example, if the market closes below the neckline and then returns above the neckline, we would like to exit the transaction. Such proximity will indicate that the mode is no longer effective and the seller will no longer be under control.
In fact, this concept can be applied to almost any mode of your trading. If the market is not favorable to you, it can help reduce the scale of losses.



Head and shoulder targets


Knowing when to make a profit may meanBetween winning trades and losing tradesofdifference. It can be said that this is the most challenging aspect of trading.
When it comes to head and shoulder patterns, there are two ways to solve them. For some people, integrating the two may be a feasible approach.



method1

The first and more conservative approach is to[backcolor=0px 0px]Record at critical support level[/table][backcolor=0px 0px]profit  . These are the areas you have defined that may lead to market rebound. Therefore, retesting one of these areas for profit may be a good idea.[/table]
Because each situation is different, these support levels will also vary. However, one thing that must always be correct is a favorable risk return rate. Therefore, it is necessary to perform mathematical calculations before conducting transactions.



Method #2

The second more proactive approach is to use measurable goals.
although[backcolor=0px 0px]Using measurable goals[/table][backcolor=0px 0px]It will be more proactive because your goals are getting further away from them, but it is also more universal.[/table]
Why are you asking?
When using this method, you need to measure the height of the entire pattern. Therefore, regardless of the situation, you will always have a specific target area.
Here are the followingEURCADOne of the daily charts:

Please note that I measure directly from below my head to the neckline. Then I walk the same distance and start measuring from the breakthrough point.
Starting from this point of measurement is a small but important detail, especially for sloping necklines.
The last point about measuring targets. Although they can be very precise, they are rarely perfect. Therefore, as an additional defense layer, it is best to consider them as general areas rather than specific levels.
In addition, try to find the key support level that intersects or is at least close to the measurement target. This will help you verify the target area and enhance confidence during the trading process.



A few examples


Who doesn't like more examples? I know
Therefore, to begin summarizing, there are[backcolor=0px 0px]some[/table][backcolor=0px 0px]Head and shoulder movements[backcolor=0px 0px]example[/table][backcolor=0px 0px]。[/table][/table]
Please be sure to pay attention to how each structure is formed in its own unique way, but still very effective in representing reversals.
FirstlyEURCADDaily chart.

Note how the tested objective aligns with the critical pivot area in this case. Although this is not necessary, it can increase greater confidence in any trade ideas arising from a reversal.
After years of upward trend, the second reversal pattern is formed within the weekly time frame of the US dollar against the Japanese yen.

Compared to the first timeEURCADThe difference in reverse is that,USDJPYThe neckline is a horizontal line. This is completely acceptable, but not very common.
In most cases, the collar support will form a diagonal. The pitch of a level can change, but one thing must always be correct - The level should be moved from bottom left to top right. Pay attention to the first one aboveEURCADThe angle on the chart.



Key insights before starting...


Therefore, by now, you have become familiar with the properties of patterns, how to find patterns, and most importantly, how to enter and exit to gain profits.
However, before you start, I would like to share some key insights with you. The rules to follow when considering these as trading head and shoulder patterns.
Let's get started.


This form must be formed after further elevation

This rule is self-evident. If it is formed after further gains, it can only be a bearish reversal pattern.
One method of careful inspection is to ensure that there is no immediate swinging high point on the left side of the formation.
Look at the chart above. Pay attention to all blank spaces on the left. This is what you are doing in the transactionwhateverWhat you want to see in the bearish reversal mode.


Shoulders cannot be above the head

You can't lift your shoulders above your head, can you?
For you, I hope not.
The same applies to this technology model. The head should always protrude above the left and right shoulders. Although there is no exact distance rule, it should be evident from the overview.






Expert tip:If you have to question the effectiveness of the pattern, then it may not be worth the risk.



The collar should be horizontal or upward, but never downward

If you notice the neckline moving from the top left corner to the head and shoulders in the bottom right corner, you may need to stay on the sideline.
For example, if you see the following content:

This is a sign of a "weak" reversal pattern. Although you may still achieve satisfactory results, the chances of winning are not in your favor.
On the contrary, this is what you want to see:

Please note how the neckline moves from the bottom left to the top right. This represents a "healthy" head and shoulder pattern, and you may want to remain vigilant.
In my experience,The steeper the angle of the collar, the greater the possibility of breakthrough and reversal. Except for the ones aboveGBPJPYExample, nothing else.


Shoulders should be at the same level

Explaining this point is a bit tricky, so it seems more appropriate to use a diagram.

Please note that both the left and right shoulders overlap to some extent. Each share a portion of the same horizontal plane. They do not need to overlap completely, but they need to share a portion of the highlighted area above.
If you find a price structure that does not match this description, then start fromTechnically speakingIt is not the first to bear the brunt.


Adhere to daily and weekly time frames

The last but not least important point is often the best time frame for performance. After several years of trading, I can confidently say that they are the most reliable on a daily and weekly time frame.
Although you can1Hours or4Trading on hourly charts, but at the risk of discovering a large number of false positives. This mode looks like a head and shoulders, but the performance is not entirely the same.
To avoid this situation, please make sure to comply with[backcolor=0px 0px]Daily time range or longer duration[/table][backcolor=0px 0px]. After all, you can usually find the most consistent trend among them.[/table]



The final words


There are many different reverse trading methods in the foreign exchange market, but few can sustain profits like the head and shoulders.
This is not just a form of trading technology. This is about the pricing behavior of "reading"Understand the fundamental transformation between buyers and sellers。
Although there is no guarantee in the foreign exchange market, the head and shoulder strategies you just learned are nearing realization. By following the above guidelines, you will be able to smoothly achieve sustained profits.


General common questions



What is a head and shoulder pattern?
The head and shoulder pattern is a top pattern, also known as a bearish reversal, in which the market experiences a higher high (head), followed by the first lower high (second shoulder).
What makes the head and shoulders so effective?
The properly formatted head and shoulders protrude like sore thumbs. It is usually marked by the first lower high point in the upward trend, which often attracts sellers.
What does the neckline represent?
The neckline with a head and shoulder pattern connects the low points of the two shoulders. This is the trigger line of the structure. The closing price below this level confirms a reversal, which often attracts more sellers.
Where should head and shoulder patterns be developed?
Ideally, it should form after an upward trend. The higher, the better. The more blank space you see at the far left end of the pattern, the more likely the pattern is to showcase your strengths.