Head and Shoulders Pattern
The Head and Shoulders pattern is considered one of the strongest reversal patterns and candlestick patterns in technical analysis, and is relied upon by traders in the Forex market to determine the likelihood of the end of an existing trend and the beginning of an opposite trend.
The strength and credibility of the pattern increases when its technical elements are complete, especially with a clear break of the neckline accompanied by strong momentum in price movement.
It is named after its shape on the chart, which resembles a head between two shoulders.
Negative Pattern (Traditional Head and Shoulders)
is a reversal pattern that often appears after an uptrend, indicating a possible shift from an uptrend to a downtrend.
The pattern consists of three main peaks:
Left shoulder: a peak followed by a downward correction.
Head: a peak higher than the left shoulder, followed by a decline.
Right shoulder: A peak lower than the head, often close to the level of the left shoulder.
• The basic condition is that the peak of the head must be higher than the shoulders, and it is not necessary for the shoulders to be exactly equal.
Neckline: The line connecting the two bottoms formed between the shoulders and the head.
It can be horizontal, sloping upward, or sloping downward (which is considered relatively weaker).
The pattern is confirmed when the neckline is broken downward with a clear close below it, triggering a sell signal.
How to enter the negative pattern
Sell after the neckline is broken and closes directly below it.
Or wait for the neckline to be retested (pullback) and then enter a sell position.
Contracts can be divided: half the quantity at the break, and the other half after the retest.
Pattern targets
The target is calculated by measuring the distance from the top of the head to the neckline and then projecting the same distance from the point of breakout of the neckline downwards.
How to set a stop loss
Close again above the neckline.
Or above the nearest peak formed on the smaller time frames before the breakout of the neckline.
The positive pattern (inverted head and shoulders)
is the opposite of the traditional pattern and often appears after a downtrend, indicating a possible reversal from a downtrend to an uptrend. It consists of three bottoms:
Left shoulder: a bottom followed by an upward correction.
Head: a bottom lower than the left shoulder, followed by an upward movement.
Right shoulder: a bottom higher than the head, often close to the level of the left shoulder.
Neckline: The line connecting the two peaks formed between the shoulders and the head.
The pattern is confirmed when the neckline is broken upward with a clear close above it, triggering a buy signal.
How to enter the positive pattern
Buy after breaking the neckline and closing above it.
Or wait for a retest and then enter a buy position.
Contracts can be divided: half at the breakout and the other half after the retest.
Pattern targets
The target is calculated in the same way:
the distance from the head to the neckline, then projected upward from the breakout point.
How to set a stop loss
Close again below the neckline after the breakout.
Or below the nearest low formed on the smaller timeframes before the neckline breakout.
Ultimately, the head and shoulders pattern is one of the strongest reversal patterns in Forex, but its effectiveness depends on several key factors:
- Clarity of the previous trend.
- Strength of the break or breach of the neckline.
- Professional capital management.
- Not rushing and entering before the pattern is complete.
