What is the Shoulders and Head Trading Pattern?
The shoulders and head trading pattern is a technical analysis pattern used to identify potential reversals in the price of a security. The pattern is established when the price of a security creates two consecutive peaks (shoulders) followed by a higher peak (the head). When the price decreases below the neckline, it confirms the reversal and suggests that the security will likely be lower.
The shoulders and head trading pattern can be found in any time frame and security. The key to successful trading using this pattern is to wait for confirmation of the reversal before entering into a trade.
The shoulders and head trading pattern can be used to identify potential reversals in the price of a security. The key to successful trading using this pattern is to wait for confirmation of the reversal before entering into a trade. Traders often use a moving average to distinguish which peaks and troughs are likely to indicate a potential head or shoulder.
Rules You Should Consider When Using This Pattern
There are two fundamental rules that traders should follow when using this pattern:
Wait For a Breakthrough
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Wait for the security’s price to break through a critical support level before entering into a trade in the opposite direction. This is because it increases the chances of smoother price action once the reversal has begun. It also gives you more room on the other side (this means if you place your stop-loss order near the neckline, there is less chance you will lose money if prices don’t move in your direction).
Trade Supporting and Resistive Necks
This means that you should only consider trading shoulders that occur below a support level and heads that appear above a resistance level. This is no guarantee of success, but it does help limit your potential losses by restricting you to more favourable entry points.
When Should This Pattern be Used?
This pattern is best used on the daily charts as it provides enough time for prices to make a new high or low before breaking through the necessary support or resistance area. The stronger the trend is, the higher probability this pattern will work out in your favour. Suppose there has been a strong downtrend recently. In that case, traders may want to wait for the price of an instrument to break back above its moving average (preferably using a bullish divergence) before entering into a long position in the direction of that trend. Similarly, suppose there has been a strong uptrend in place. In that case, traders may want to wait for the price of an instrument to break back below its moving average (preferably using a bearish divergence) before entering into a short position in the direction of that trend.
As with all trading patterns and technical analysis tools, the shoulders and head trading pattern should not be used independently. Technical analysis is one piece of the bigger puzzle for making money by trading securities. It is vital to use other forms of technical analysis alongside this pattern, such as support/resistance levels, candlestick patterns or charting oscillators. This will give you a better idea about whether or not this pattern has any real potential to provide you with an edge over your competitors.
While there are many advantages of using this pattern, there are also some disadvantages that traders need to be aware of before incorporating it into their existing strategy:
- While reliable in trending markets, this pattern can be unreliable in sideways or choppy markets.
- The pattern can often provide several false signals before finally confirming the reversal.
- As with most technical analysis patterns, traders need to be aware that past performance does not indicate future results.
In Conclusion
The shoulders and head trading pattern can be a powerful tool when used correctly. It can help traders identify potential reversals in the price of a security, providing them with an edge over their competitors. However, you should remember not to use this pattern independently and use it with other forms of technical analysis. You can join here to use this pattern with your forex trades.
