Price action trading is probably one of the most used methods among professional forex traders and that happens because it is the greatest tool that can help someone to understand what happens behind the chart he or she can see on the screen. Currency trading is a real challenge, we must admit, and price action is really a useful tool that can help you.
When analyzing the chart, one could notice that certain structures or pattern occur over and over again. Some of them had been documented and you can find a lot of information online. Maybe you have managed to find a new pattern. What is important to understand is that these patterns can help traders anticipate future moves and that is why in this material we will discuss one of them.
Head and Shoulders – reversal pattern
We have chosen the head and shoulders pattern because it has some unique characteristics linked to it. It is a price structure that signals a reversal will be happening in the future, so it can help traders get into a new trend early.
Source: Wikipedia.org
Head and shoulders patterns applied to currency trading are highly effective ways to anticipate trend reversals, as you can see from the picture above. The most important characteristic of this pattern is its symmetry. A valid and efficient H&S pattern will always have approximately the same number of candles on both shoulders.
This pattern shows how the order flow shifts during a transition between trends and can offer a good opportunity to enter the market in the direction of the new trend.
How could someone trade the H&S pattern?
There a huge debate on how to trade this pattern and various experts are claiming that the best way is to enter the market after the breakout of the neckline. Although this might help, we believe there is a better alternative.
From our point of view, the best place to enter the market is at the top of the right shoulder.
Why is that?
Because by doing this you are:
- Increasing your profitability
- Reducing your risk.
To conclude, the head and shoulders pattern does not form too often in the forex market, but when it does and all the above-mentioned conditions are met, it could result in a good trading opportunity that can generate returns over time.
Risk Warning and Disclaimer
Trading the foreign exchange market carries risk and may not be suitable for all investors. This is not an investment advice and it is just used for information purposes.