Friday, January 30, 2015

Classic Pattern - Head and Shoulders





Head and Shoulders patterns are reversal formations that usually form at the market tops. Head and Shoulders patterns are very reliable, but failures do occur. When Head and Shoulders patterns fail, they reverse the pattern and trade in an explosive manner. A trend line or neckline is drawn connecting the Head and Shoulders pattern to determine the potential trade opportunities and targets. The neckline can be also formed in an angle (slanted).



Trade: Connect Head and Shoulders bottoms in a trend line or neckline. When the price closes below the neckline, a potential short trade is signaled. Short one tick below the breakdown bar's low.

Target: Compute the vertical distance between the apex of the Head and Shoulders pattern and the neckline. The target is set below this distance from the neckline.

Stop: After a trade entry, if the price closes above the neckline, a potential failure of the pattern is signaled. Place a stop order above the neckline.








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