The Head and Shoulders pattern is one of the most popular and reliable chart patterns and it is often used by both intra-day traders as well as swing traders, simply because it can appear on any time frame. The Head and Shoulders pattern appears at market tops and it indicates the beginning of a bearish trend. From the name, the pattern somewhat looks like a head with two shoulders.
The shape of this pattern starts with the first shoulder formation; the price rises to reach a new high and then retraces to a new low. After that the head is formed. This happens when the price rises again to form a higher top and then falls back once again near the low formed in the first shoulder. Finally, the second shoulder is formed. This happens when the price reaches a high that is lower than the high reached in the formation of the head, but again, it was followed by a drop to the low of the left shoulder.
Formation of the Head and Shoulders pattern is rarely perfect, which means there may be some noise between both shoulders and the head, which is reflected with candlestick shadows. For this reason, it is important to wait until the pattern is completed before executing trades. This pattern can signal a reversal only upon completion of the three main sequential steps and when the price falls below the Neckline, which is the support level formed when connecting the left shoulder’s low with the low created after the head.
Both shoulders, the head and the neckline are important to this pattern, they make it easy to identify entry point, stop loss levels and profit targets. The most common entry point is the breakout of the Neckline, with a stop above the second shoulder. The pattern is always followed in both FXLORDS’ services, Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course. This pattern is usually used as a confirmation with other chart patterns and technical indicators like the CCI and the Stochastic Oscillator.