How to Trade the Head and Shoulders
The head-and-shoulders chart pattern is a popular and easy-to-spot pattern – once a trader is aware of what they are watching for. The pattern appears on all times frames and can therefore be used by day and swing traders as well as investors. Entry levels, stop levels and price targets make the formation easy to implement as the chart pattern provides important and easy-to-see levels.
The head and shoulders top chart formation consists of three peaks, which develops after a strong bullish trend. The first and last peak are approximately the same height and are classified as the shoulders.
Head and shoulders tops represent the transfer of power from the bulls to the bears.
Conversely, the inversion of the head and shoulders top is the head and shoulders bottom.
Instead of peaks, there are troughs. This pattern develops after an extensive bearish trend and represents the transfer of control from bears to the bulls.
HOW TO TRADE THE HEAD AND SHOULDER PATTERN ?
- Wait for a candlestick to break to break the neckline to the downside.
- Then place a sell stop order just a few pips (3-5 pips at least) under the low of the candlestick.
- Place you stop loss 3-5 pips above the high of the right shoulder.
To other option is
- Once price breaks the neckline, just wait for price to rally back up to touch the neckline which it intersected. This intersected neckline would now act as a resistance line.
- Once it touches the neckline, place a sell stop order 3-5 pips under the low of the candlestick that touches the neckline.
- Place you stop loss anywhere from 10-50 pips(depending on which timeframe you are trading in) just above where your sell stop order is placed.
- Try to use reversal candlestick patterns as your short entry confirmation on this option 2 entry style.
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