Trading Head & Shoulders Pattern: New Techniques
The Head & Shoulders is one of the most known chart patterns, and often considered the best one. Enjoying a win rate of 95%, it is not surprising. In this tutorial you will learn new, undisclosed methods to trade this chart pattern.
Introduction
The Head & Shoulders consists of three tops (or bottom), with the second one being beyond the 1st and 3rd, thus creating a shape of a Head that is surrounded with two shoulders. The line that serves as support and connects the shoulder-head-shoulder from below is called Neckline.
Real Market Examples
Psychology
The first top (shoulder) is an attempt of the sellers to reverse the market. This attempt succeeds temporarily, but buyers succeed in taking the market to higher highes, creating a Head. Sellers than prove to be even stronger, by reaching the previous lows. Buyers make last attempt to push prices higher but sellers block them in their ultimate demonstration of power, eventually to push prices below neckline and reverse the market. While Triple Bottom indicates inability to break a certain level, the H&S pattern indicates a will to reverse the market - therefore it is a stronger pattern.
Bollinger Confirmation
Bollinger Moving Average can be used to confirm the validity of the pattern: If first shoulder and head are above the Moving Average and the second shoulder is below the Moving Average, the H&S pattern is confirmed.
Percentage
Pattern is confirmed when price breaks the neckline and closes below it. After confirmation, the Head & Shoulders pattern reaches target at about 95% of the time. We will learn different techniques to trade this pattern that do not wait for neckline to break but predict the possibility of an Head & Shoulders. This technique is also profitable yet not as high in terms of hit rate as the first one.
Volume
Volume should be light at the two first shoulder and head, and rise at the second shoulder to indicate that sellers has strength and about to reverse the market.
Trading
Conservative and Classic Method
This is the classic and accepted trading methods of the Head & Shoulders pattern. The classic traders will wait for the neckline to break before entering a trade. The more conservative traders will even wait for pullback of price to finally confirm their trade entry. This is the most precise entry there is that has the highest win rate, and also very good Risk:Reward ratio.
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Aggressive Trading Method
This is an undocumented trading method, unknown to many traders. It starts by detecting a shoulder and a head. Then, the neckline is drawn on the pattern, and a parallel line is drawn on the H&S, to predict the location of the second shoulder. The aggressive trader now awaits the second shoulder and upon a candlestick confirmation he enters at the second shoulder, to catch the whole movement!
Pay attention, if price does not break the neckline, the pattern is considered failed and should not be traded.
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