Head and Shoulders (Forex Education)
By Roger Baettig | August 31, 2010 1:00 AM EST
A Head and Shoulders pattern is a reversal pattern and for the pattern to be reliable, it should occur in an uptrend. An uptrend is reversed at the left shoulder and sellers drive prices back up to the neckline. Buyers then push prices up to the head and sellers drive prices back to the neckline again. Any buyers who are remaining are only able to push prices back to the right shoulder before sellers step in and drive prices through the neckline.
Trading the pattern: The neckline of this pattern can be determined by drawing a trend line through the lowest low of the left shoulder and the head. Traders should watch how prices at the right shoulder react to the neckline. Should prices push through the neckline and close below that level, it is a signal for bearish entry. Conservative traders who want to avoid getting in on a failed breakdown can wait to enter short on the retest of the neckline, if prices cannot close above the neckline, traders can look to enter short.
Measuring the move: Measure the distance between the price at the lowest low of the pattern and the neckline, in this case, the distance between the price at the head and the neckline. This difference is then added to the confirmation line after the break out, what this means is that a downward price movement from the breakout point plus the height of the pattern can be expected.
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