Page 8 - Module & Head and Shoulders

Module 7 – Head and Shoulders

ENTRY METHOD # 1

THE FIRST METHOD TO ENTER
A HEAD AND SHOULDERS
BREAK IS TO SELL AS SOON AS
THE CANDLE CLOSES BELOW
SUPPORT, OR USE A PENDING
ORDER TO GO SHORT JUST
BELOW THE NECKLINE. THIS
METHOD DOES NOT WAIT FOR
THE MARKET TO CLOSE BELOW
THE NECKLINE

ENTRY METHOD # 2

IN THE SECOND METHOD,
WE’RE WAITING FOR A RETEST
OF THE NECKLINE AS NEW
RESISTANCE. THIS HELPS
VALIDATE THE RECENT BREAK
AND OFFERS A MORE
FAVORABLE RISK TO REWARD
RATIO.

Placing Your Stops
In the traditional market top pattern, the stops are placed just above the right shoulder (topping
pattern) after the neckline is penetrated. Alternatively, the head of the pattern can be used as a stop,
but this is likely a much larger risk and thus reduces the reward to risk to ratio of the pattern.

In the inverse pattern, the stop is placed just below the right shoulder. Again, the stop can be placed
at the head of the pattern, although this does expose the trader to greater risk.

Setting Your Profit Targets
The profit target for the pattern is the price difference between the head and low point of either
shoulder. This difference is then subtracted from the neckline breakout level (at a market top) to
provide a price target to the downside. For a market bottom, the difference is added to the neckline

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