The head and shoulder chart pattern is mostly seen in uptrend’s and is based on a reversal pattern, we will learn how to trade this pattern by learning to recognize this pattern when it starts to form and then trading it.

This strategy is opposite of inverse head and shoulder trading strategy.

What is the head and shoulders pattern and how does it look like?

The head and shoulder chart pattern can from in any time frames ranging from 1 minute up to the monthly time frame.

This is how chart of what head and shoulder chart pattern look like:

Timeframes : Preferably 5 minutes and above.

Instrument : Any

Indicators : None Required.

Let us understand using a chart:

1. Sellers come in at the highs (left shoulder) and thus probing the downside which results in a beginning of neckline.

2. Soon after that buyers return to the market and give a push prices to new highs (the head).

3. But, the new high (head) is not sustained as price falls back down due to sellers pushing price down to create a continuing neckline.

4. Buyers enter again pushing the price up to a high, but this high does not exceed the previous high (the head). The next high is the right shoulder.

5. Sellers enter in to the trade and push the price down and this time the neckline is intersected.

6. Buyers may get in here and push price up to test the neckline that was intersected which would act as resistance

7. Sellers get in and push the price down.

How the Head and shoulder chart is formed?

Price does not rise or fall all the time. There are always times when it will reverse and go in the opposite direction.

So, if the market is in an uptrend, it does not always keep going up because sooner or later the uptrend will slow down and the forces of demand and supply will balance out and this can result in the head and shoulder pattern being formed.

Pattern 1:

Pattern 2 :

Trading Rules :

There are two options on how we will trade the head and shoulder pattern:

1^st Option :

• Wait till the candlestick break the neckline to the downside.
• Now Place a sell stop order just few pips (minimum of 3 to 5 pips) under the low of the candlestick.
• And Place a stop loss of 3-5pips above the high of the right shoulder.

2^nd Option :

• After price breaks the neckline, wait for the price to rally back up to touch the neckline which it intersected. This intersected neckline is the resistance.
• After it touches the neckline, Place a sell stop order 3-5 pips under the low of the candlestick that touches the neckline.
• Then Place stop loss anywhere from 10-50 pips depending on the timeframe of the chart and above where our sell stop order is placed.
• Use reversal candlestick patterns as our short entry confirmation on this option 2 entry style.

Take Profit :

• Set Take profit 1 is to 2 times the amount risked in pips.
• A second option would see a previous swing low point where price moved up from and use that level as take profit target.

Pros :

• It is easy to identify for more experienced traders.
• Defined risk and take profit levels.
• Potential to exploit big market movements.
• Useful in all markets.

Cons :

• Difficult to identify for novice traders.
• Confirmation candle may close far below neckline resulting in large stop loss distances which may need to be reviewed.
• Price can pullback and retest the neckline often confusing beginner traders.
• Risk-reward ratios are not always favorable.