Page 7 - Module & Head and Shoulders

Module 7 – Head and Shoulders

Sellers come in at the highs (left shoulder) and what happens is that the downside is probed (which
results in a beginning neckline). What happens next is that buyers soon return to the market and
push prices to new highs(the head).

However, the new high (head) is not sustained as price falls back down due to sellers pushing price
down to create a continuing neckline.

Buyers enter again pushing the price up to a high, but this high does not exceed the previous high
(the head). This high is the right shoulder. Sellers get in and push the price down and this time the
neckline is intersected. Buyers may get in here and push price up to test the neckline that was
intersected which would now act as a resistance. Sellers get in push the price down.

4. How to trade the head and shoulders pattern

Currency Pairs: Any
Timeframes: Preferably 1h and above
Forex Indicators: None required

The recommended method (Entry Method # 1) to trade this pattern is to wait for pattern completion
and enter upon a break of the trendline or neck line. One should not assume that a pattern will
develop, or that a partially developed pattern will become complete in the future.

Partial or nearly completed patterns should be watched, but no trades should be made until the
pattern breaks the neckline. In the head and shoulders we are waiting for price action to move lower
than the neckline after the peak of the right shoulder.

For the inverse head and shoulder, we wait for price movement above the neckline after the right
shoulder is formed. A trade can be initiated as the pattern completes.

Plan the trade beforehand, writing down the entry, stops and profit targets and noting any variables
that will change your stop or profit target. The most common entry is when a breakout occurs – the
neckline is broken, and a trade is taken.

Another entry point requires more patience and comes with the possibility that the move may be
missed all together.

The Entry Method # 2 method involves waiting for a pullback to the neckline after a breakout has
already occurred.

This is more conservative in that we can see if the pullback stops and the original breakout direction
resumes. To confirm the order entry, the Fibonacci tool can be used to determine the retracement
value.

This is easily determined by drawing in Fibonacci from the highest point of the trend (head) “A” to
the next confirmed low “B” (After break of the trendline and spiked below the previous lows).

Your entry will then be determined by the Fibonacci values closest to the highest level of the left
shoulder. (i.e 61.8, 50 or 38.2)

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