Trade Head and Shoulders Pattern only with confluence!!! What are confluences to add with head and shoulder pattern to trade it perfectly like a pro trader instead of trading every head and shoulder pattern like a retail trader and then losing money with many psychological issues in mind? You will learn in this article. Every type of detail will be covered in this article about the perfect head and shoulder pattern in forex trading.
The trading chart pattern is one of the important techniques in forex trading and the head and shoulder pattern is one of the most important chart patterns. As head and shoulder pattern is the simplest one so every retail trader tries to trade it so we can’t trade every head and shoulder pattern but only use confluence, geometry, risk management, and discipline in forex trading.
What is a head and shoulders pattern?
As the name represents there must be two shoulders and one head because of the natural pattern. It consists of two minor swings (shoulders of the pattern) in price and one big swing in price which will be called as head of the pattern. This is called a head and shoulders pattern. The Head and shoulders pattern is a reversal pattern. Let’s see the images below.
Understanding correct head and shoulders pattern
The important thing here is that in trading chart patterns, correct recognition of swings in price, as well as waves, is an essential factor. A sequence in price is also essential. See the image below to get the answer to the question that how to identify correct ways or swings in price. Identification of a good chart pattern is important instead of trading every head and shoulder pattern in forex trading. Let’s move to the next point
inverse head and shoulders pattern
Head and shoulders is a bearish pattern in the forex technical analysis whereas the inverse head and shoulder pattern is a bullish pattern. It’s the same as a head and shoulder pattern like three swings and it forms at the end of a bearish trend.
Pattern to Avoid
See in the image below which one is the correct head and shoulder pattern and which one is the wrong pattern. After the formation of the Head, the next wave must form an LH and after the lower high neckline breakout. This indicates a perfect pattern. If after the formation of the head, the next wave is forming a HH then this will not be considered as a head and shoulder pattern. So just keep it in mind.
If you don’t know how to draw a valid trend line in forex technical analysis then you must read this article first before progressing further. The neckline is a line that will act as a barrier and this is a baseline in the formation of head and shoulder patterns. Breakout of this barrier will reverse the price that’s why the head and shoulder pattern is a reversal pattern. Neckline breakout is a trade confirmation. Before entering a trade, confirmation is required. Now let’s move to the important topic of this article.
Head and shoulders pattern rules
Three rules to know while identifying a head and shoulders pattern.
- Three clear visible swings in price
- Lower High formation before the breakout of the neckline in case of head and shoulders pattern
- The risk-reward ratio must be at least 1:2
How to trade head and shoulders
There are three simple methods to trade head and shoulders patterns with the confluence for a high probability and high-risk reward trade setup. The addition of the following three confluence will add more power to your trade setup.
- Trend Confluence
- Range Confluence
- Candlestick Confluence
The trend is your friend but how to trade a reversal chart pattern with the trend? Read more… The formula of higher timeframe analysis will be applied here. Only head and shoulder patterns that will form in the direction of a higher timeframe can be traded. Let me show you an example from history for a clear understanding of trading head and shoulder patterns with trends.
It’s very easy and simple to trade within a range. Buy from support zone and Sell from Resistance zone. But one should not sell or buy blindly from these zones but only with a proper system. The Head and shoulder pattern at the resistance zone within a range will work perfectly on the other hand an inverse head and shoulder pattern at the support zone will also work perfectly. Video of live analysis of head and shoulder pattern using Range confluence had been published on YouTube.
Candlestick confluence is the last one and it will act as confirmation for entry in a trade. One thing to remember is always to wait for a clear breakout or setup. One trade-in a month is enough to keep it in your mind to control yourself from over-trading. Always wait for a clear setup. After Big candle breakout of the neckline then Entry will be at a pullback using Fibonacci techniques or instant entry after breakout but risk management must be followed. So let the trade run and breakeven trade in case of instant entry to maintain a good risk-reward. At pull back, there must be a pin bar or engulfing candle to enter in a trade.
- Stop-loss will always be above high of the shoulder in the case of the head and shoulder pattern.
- In the case of the head and shoulder pattern, measure the length between the neckline and the high of the head and copy-paste it down from the breakout of the neckline. This will be the price target. In the case of inverse head and shoulder, the length will be the distance between the low of the head and neckline.
Only head and shoulder pattern have been elaborated here but the inverse head and shoulder pattern will also work the same. Inverse Head and shoulder pattern is a buy setup and a simple head and shoulder pattern is a sell setup. That’s all.
Practice Makes a Man Perfect
Note: All the viewpoints here are according to the rules of technical analysis. we are not responsible for any type of loss in forex trading.