In an inverse head and shoulders pattern the formation is inverted and all the above principles apply in the reverse direction. We put together a simple checklist that you can use to easily identify the best head and shoulders patterns.

Now that you have the head and shoulders pattern rules you can always reference them to validate a pattern you are unsure of! Entering the head and shoulders pattern trade is rather straightforward. Following the general guidelines, you can enter a position once the price breaks below the neckline.

Most people wait until the candle closes for the period and then they will open a position. For example, if someone is looking at the 4-hour chart, they might wait until the 4-hour candle closes. Then if the market opens below the neckline in the next period, they will enter with a short position. This simplicity is due to the fact that currencies are traded in pairs and every trade involves a simultaneous long and short position.

The process is more complicated for stock traders because before they can short a stock, they must borrow it from their broker. The borrowed stock is then sold on the market and later repurchased in order to return it to the broker.

Almost every trader will place a stop loss order to protect themselves from adverse price movements. We highly recommend that you do the same. If you prefer a tight stop, use the price level slightly above the breakout candle.

If you want to leave a bit more breathing room for your trade, consider placing your stop loss above the head. This will decrease the likelihood that your position will be stopped out prematurely, but you will need to decrease the position size to keep risking the same percentage as you would with a tight stop.

To find the head and shoulder target price, first measure the distance between the head and the neckline.

Next, take this distance and subtract it from the neckline breakout level to arrive at the profit target.

We usually subtract the height of the pattern from the price level at the close of the breakout candlestick, not from the price level of the neckline, but you can do it either way.

Another way to calculate the profit target is to choose an exit point based on the market structure. This requires more experience as you need to be able to estimate how far the new trend might travel and where it might change direction.

For instance, carry traders specialize in buying high yielding currencies with low yielding currencies. If a head and shoulders pattern allows them to get into such a position, they will try to stay in it as long as possible because the interest rate differential will be deposited in their trading account every day by the broker.

You can do whatever works for you. With losses largely left unmentioned, anyone who trades head and shoulders patterns will quickly realize that failure is quite common. First, the pattern began unfolding after an extended run up in prices. Then, there were long upside wicks at the left shoulder and head showing that the market struggled to advance beyond these high prices. Finally, the price broke below the neckline with a strong bearish candle.

Despite being a seemingly perfect opportunity to go short, if you had sold the market at this point, you would have suffered a loss. Your stop would have been triggered even if you had placed it if far from the entry price.

Head and shoulders are no silver bullet. None of them are particularly up-to-date, but arguably not much has changed about how people trade chart patterns. The first study was conducted by no other than the Federal Reserve Bank of New York.

The researchers from the FED evaluated the predictive power of the head and shoulders pattern from March to June In essence, they found that trading head and shoulders patterns would have been significantly profitable if one had speculated in multiple currencies simultaneously during the investigated time period.

The second study we found was one that appeared in Applied Economics in Unfortunately, this study is not free but the abstract is quite telling:. For various combinations of the building blocks of head-and-shoulder definitions the result is generally negative: returns to head-and-shoulder trading rules are not significantly positive —and if there is any evidence for non-zero returns at all, then it is evidence for negative returns.

The answer is: you must figure it out yourself through backtesting. Studies seem to forget that chart patterns are not high-probability signals on their own. These types of patterns are merely frameworks that help bring structure to the market, manage risk, and project potential profits.

Also called head and shoulders bottom, the inverse head and shoulders pattern is simply the opposite of the traditional head and shoulders. This means that the defining criteria, as well as the entry rules and profit target rules, are all reversed.

Inverse head and shoulders patterns occur following a downtrend. Their primary characteristic is a sequence of three troughs with the lowest in the middle.

The inverse head and shoulders pattern is complete when the price crosses the neckline after forming the right shoulder. In addition to these basic features, there are a few criteria you should keep in mind when spotting inverse head and shoulders patterns:.

Of course, all inverse head and shoulders patterns exhibit some diversity. Individual situations can vary, but you should keep these points in mind as general guidelines. This is one of the significant reasons this pattern can make you profit every day. Questions I often get is about entries, objective exits, and Stop losses.

I am going to show you everything you need to know to make money from this reversal pattern. The best question would be, what qualifies as a head and shoulders? This is the very first part. There must be a clear prior uptrend. As a general rule, the longer the uptrend lasts, the stronger the reversal is likely to be.

At this point, the market moves down to form a higher low. This gives a peak, which is the left shoulder. It then moves down and forms another low. This completes the head structure. At this point, we have the left shoulder and the head of the structure. The pattern is now starting to take shape. The advance from the low of the head forms the right shoulder. This peak is lower than the head a lower high.

At this point, the pattern structure is clear. But one main part missing: The Neckline. This level will become a key component when we get into how to trade the breakout.

The neckline is drawn by connecting low points A and B. Low point B marks the end of the head and the beginning of the right shoulder. Typically the neckline is not horizontal. The psychology in every pattern is a shift in strength between the buyers and the sellers. In the head and shoulders, the buyers are tiring.

That means we are having a change of power from buyers to sellers. The prior uptrend indicates a lot of strength in the buyers, pushing prices higher. As the buyers are tiring, there is a general shift of power from the buyers to the sellers. At this point, prices start to fall as more sellers come in. this is how the left shoulder gets to be formed.

At the low of the left shoulder, we have more buyers who are not yet convinced of the falling prices and take advantage of falling prices to buy more. This leads to prices pushing even much higher to form the tip of the head. Most of the buyers exit their positions, which causes a lot of panic selling that completes the head structure.

So if you just bought at the tip of the head, you would now get trapped. At the low of the head, a few buyers take advantage of the low prices. This causes a slight rise in the prices up to the tip of the right shoulder.

Remember, we are having very few buyers in the market this time. So the right shoulder is fully formed when almost all the remaining buyers exit positions, and now more sellers enter the market, pushing prices lower. Now we are at the point where we are in the neckline zone, waiting for the breakout.

We need to start by knowing what qualifies as an actual breakout. A real break out is when the candle closes below the neckline , and I mean close below the neckline, not just the tail touching. Now that we know what an actual breakout looks like let us see how to enter trades following the head and shoulder pattern.

Now, this is the fun part — how to trade and, of course, profit from a head and shoulders reversal. There are two significant ways how you can enter a trade on a header and shoulders breakout; An aggressive entry and a Conservative entry. An aggressive way to enter the head and shoulders is to enter as soon as the candle breaks through and closes below the neckline. Just as shown at Sell 1 entry. A more conservative way of trading the neckline break is to wait until the price has broken through the neckline and then retested from the other side as resistance.

Just as shown on Sell 2 entry.

Join Our Telegram Group Chat - CLICK HERE. This is one of my favorite reversal patterns to trade. It is one of the most recognized of all chart patterns. It does not take a seasoned trading eye to spot one forming on a chart.

This is one of the significant reasons this pattern can make you profit every day. Questions I often get is about entries, objective exits, and Stop losses. I am going to show you everything you need to know to make money from this reversal pattern. The best question would be, what qualifies as a head and shoulders?

This is the very first part. There must be a clear prior uptrend. As a general rule, the longer the uptrend lasts, the stronger the reversal is likely to be. At this point, the market moves down to form a higher low. This gives a peak, which is the left shoulder. It then moves down and forms another low. This completes the head structure. At this point, we have the left shoulder and the head of the structure. The pattern is now starting to take shape.

The advance from the low of the head forms the right shoulder. This peak is lower than the head a lower high. At this point, the pattern structure is clear. But one main part missing: The Neckline. This level will become a key component when we get into how to trade the breakout. The neckline is drawn by connecting low points A and B. Low point B marks the end of the head and the beginning of the right shoulder.

Typically the neckline is not horizontal. The psychology in every pattern is a shift in strength between the buyers and the sellers. In the head and shoulders, the buyers are tiring. That means we are having a change of power from buyers to sellers.

The prior uptrend indicates a lot of strength in the buyers, pushing prices higher. As the buyers are tiring, there is a general shift of power from the buyers to the sellers. At this point, prices start to fall as more sellers come in. this is how the left shoulder gets to be formed. At the low of the left shoulder, we have more buyers who are not yet convinced of the falling prices and take advantage of falling prices to buy more.

This leads to prices pushing even much higher to form the tip of the head. Most of the buyers exit their positions, which causes a lot of panic selling that completes the head structure. So if you just bought at the tip of the head, you would now get trapped. At the low of the head, a few buyers take advantage of the low prices. This causes a slight rise in the prices up to the tip of the right shoulder. Remember, we are having very few buyers in the market this time. So the right shoulder is fully formed when almost all the remaining buyers exit positions, and now more sellers enter the market, pushing prices lower.

Now we are at the point where we are in the neckline zone, waiting for the breakout. We need to start by knowing what qualifies as an actual breakout. A real break out is when the candle closes below the neckline , and I mean close below the neckline, not just the tail touching. Now that we know what an actual breakout looks like let us see how to enter trades following the head and shoulder pattern. Now, this is the fun part — how to trade and, of course, profit from a head and shoulders reversal.

There are two significant ways how you can enter a trade on a header and shoulders breakout; An aggressive entry and a Conservative entry. An aggressive way to enter the head and shoulders is to enter as soon as the candle breaks through and closes below the neckline. Just as shown at Sell 1 entry. A more conservative way of trading the neckline break is to wait until the price has broken through the neckline and then retested from the other side as resistance.

Just as shown on Sell 2 entry. This is based on the fact that broken support becomes new resistance and vice versa. So when the candle closes below the neckline. Wait for the price to come back to the neckline for a retest and find resistance, then you can enter a sell position. This combination is why I almost always opt for the conservative method.

Of course, there is a greater chance of missing an entry by waiting, but the potential reward for doing so is equally significant. Take a look at another example on how to make entries on forex head and shoulders below on the AUDUSD, H4. There are two ways of setting stop losses that I will share with you here. Like conservative and aggressive entries, we can also put our stop losses aggressively or conservatively. this gives the market enough breathing space between the entry and stop loss but cuts your potential profit in half or worse since the Stop is very wide.

In this case, the Stop loss is just set on the previous high as shown above on Stop loss2. I prefer to use aggressive stop-loss only because it allows for a much better risk to reward ratio while still offering room for price to swing up and down.

As you can see from our chart, the stop is placed just above the last swing high stop loss 2. This earns you more money with a small risk. A specific profit target can be a powerful catalyst for the growth of your account balance. For a head and shoulders pattern, the primary method you can use in setting profit targets is the measured objective.

This is the traditional way of setting a profit target on the head and shoulders pattern. Then measure this same distance pips down from the neckline, beginning at the point where prices penetrate the neckline after the completion of the right shoulder. This is the same method we used to measure the profit target for our second example on the AUDUSD, 4-Hour chart below;. This gives the minimum objective of how far prices can decline after the completion of this top formation.

Usually, this measured target zone corresponds to a critical support level. This confluence increases the probability of your profit target being hit and gives you greater confidence in your target. In conclusion, the head and shoulders pattern is very profitable if you follow the basic rules. Join Our Forex Forum and Community : Visit. Save my name, email, and website in this browser for the next time I comment. Attachment The maximum upload file size: 5 MB.

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Notify me of follow-up comments by email. Press ESC to close. Share Article:. breakout , forex , forex strategy , free forex strategy , head , shoulder. Ghost32 [email protected]. January 11, Pirate One EA 1. One Comment. helmut Wegner on January 13, where is the download link for this ea?

Trade Forex Head and Shoulders Pattern. Leave a Reply Cancel reply Save my name, email, and website in this browser for the next time I comment. Drop file here Notify me of follow-up comments by email. Free Daily Forex Signals. Join Now.

Log In. Many thanks, Best Reply. The problem with this approach is that you leave yourself exposed to the possibility of a false break. Justin Bennett says Cheers. Yes you well written about this pattern There are many different ways to trade reversals in the Forex market, but few are as consistently profitable as the head and shoulders. Justin Bennett says Thanks, Mirza. kindly send my log in access Reply.

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