The Head and Shoulders pattern is known as a “trend-reversal pattern.” It is also known for being one of the most reliable trend-reversal signals in the market. Basically, the head and shoulders is when the currency pair makes 3 peaks close together in time, with the middle peak higher than the two side-by-side peaks (see video below for visual example and explanation.) Therefore, it looks like an outline of a head with two shoulders, one on each side of the head.
When a head and shoulders forms on the chart, there will also be a discernible “neckline” within the pattern. When the neckline of support is broken - go SHORT! The odds are well on your side that you will get some big pips fast when the neckline of a head and shoulders pattern is broken.
There is also a reverse head and shoulders pattern, which of course, is the reverse of what has been just described. This youtube video explains more with a visual.
By the way, the producer of the youtube video above represents a forex signal service. I do not endorse that service nor do I recommend it nor do I know anything about it. Just a little disclaimer for you. Personally, I don’t think any real trader needs a signal service, and I’ve never known one to really perform exceedingly well over time. The charts themselves give you the best signals, if you learn to read the charts and price action. It’s much easier than you think. The only hard part is having patience and self-control to wait for a really good price action/chart set up…and to only trade at those times.
- Ann Pevey - who has been successfully trading this preferred loophole strategy for over a year now.
July 10th, 2009 at 2:17 am
[...] I just went SHORT on EUR/USD at 1.3946. SL 1.3975 and TP 1.3898. I took this trade because price action on the EUR/USD just broke through the neckline of a head and shoulders pattern on the hourly chart. This means price should most likely drop to the next support level before considering a rebound. I also just wrote a post with a video about trading head and shoulders patterns today. [...]
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