Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.


Head and Shoulder (H & S) Chart Patterns

Recommended Posts

The head and shoulders chart pattern is a pattern that falls into the class of bearish reversal chart patterns. Head and Shoulder chart patterns occurs at the top of a trend and is usually used as a determinant of a bearish reversal of the existing bullish price action.


A head and shoulders Forex chart pattern is made up of:

1. Candlesticks that form a crest (the shoulder 1)

2. Second crest which is usually higher than the first one (the head)

3. Third crest which is not as high as the second, and may or may not be as high as the first crest (shoulder 2)


Head and Shoulder chart patterns can be a bottoming formation after a downtrend or a topping formation after an uptrend. The bottoming pattern is a low price then followed by a retracement then a lower low, the head, and a retracement then a higher low which is the shoulder. On the flip side, a topping chart pattern is a high followed by retracement then a higher price high and finally a lower low. Head and shoulder chart pattern is complete when the trend line which connects the 2 highs, bottoming pattern, or 2 lows, the topping pattern, is broken.


Application of Head and Shoulders Chart Patterns


To be able to identify Head and Shoulders chart patterns, there are 3 crucial things:

1. Have an eye to see how the candlesticks line up

2. Have the ability to use the drawing tool of your Forex trading system to make the appropriate traces across the highs of the candlesticks

3. Draw a correct neckline, which is the landmark for the trade entry

You should ensure that the head and shoulder have to fully form with the 2nd shoulder being almost complete before placing a Sell stop. The Sell stop should be placed about 5 pips below the neckline. When you are using Head and Shoulders chart patterns to trade in the Forex market you should know that the extent of the bearish reversal of the price action is equidistant to the distance between the neckline and the peak of the head. This is the profit point you should be eying. It is worth mentioning that the entry signal is usually reinforced when the price action is in an overbought region or is at a resistance level.


It is very important that traders wait for the head and shoulder chart pattern to complete before they make a move. One should not assume that a pattern will develop, or become complete in the future. You should watch partial patterns keenly but you should not make any trades until the head and shoulder pattern breaks the neckline. The neckline is the landmark for the trade entry.


On the other hand, for the inverse head and shoulder, you should wait for price movement above the neckline after the right shoulder to be formed. A trade can be initiated as the chart pattern completes. You should always plan your trade beforehand, jotting down the profit targets, variables that may change your revenue target, entry as well as stop points.

Just like there are two sides of a coin, trading using head and shoulder chart patterns has its limitations. First and foremost the chart pattern is not perfect and as such can fail at times. This chart pattern is not always tradable. For instance, in the event that there is an extensive drop of one shoulder due to unpredictable even then there is a high likelihood that the price target will not be hit. Bearing in mind that you have to wait for the pattern to develop fully, it could mean waiting for longer periods which can affect your trading.

In conclusion, though head and shoulder patterns can be subjective at times and take long to develop, the complete chart pattern provide entries, profit targets and stops making it easier to implement a trading strategy.




Share this post

Link to post
Share on other sites

The neckline is a resistance line, and if it breaks, a significant support line will usually emerge from the neckline. If there is a very heavy volume in the market, the neckline breaks, and there is a confirmation of a trend reversal. You can re-test the neckline using a retracement, but only if the support line is broken.

Share this post

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

  • Create New...

Important Information

By using this site, you agree to our Terms of Use.