Now, Forex is also a kind of trading, and many people believe Forex trading to be similar to Stock Trading. However, this is not true, and both these markets differ from each other. While the forex market basically involves the exchange of currencies, the stock market involves the trading of equity securities of real companies. Now regardless of the market, you are planning to invest your money in, it is vital to gain investment knowledge so that you can make sensible decisions.

These decisions would decide whether you will be growing your money, or would you be losing it in the market. Because we are dealing with the Forex markets, we are going to talk only about the Foreign Exchange markets.

Now, there are a lot of different strategies, and analyzing techniques involved in the Foreign Exchange market that can help you analyze the Forex market better. Now there are several analyzing techniques involved in Forex trading like reading Forex charts, analyzing the performance of currency pairs, and more. However, in this article, we are going to talk about a strategy that is extremely popular amongst seasoned Forex traders that goes by the name of the Head and Shoulders strategy.

We are going to tell you everything you need to know about the Head and Shoulders strategy including what it is, how it works, how to use it, and the benefits that it offers. Before we get into a discussion of the head and shoulders pattern, it is important to gain basic knowledge about the market , so this article is a level playing field, even for those who are just interested in Forex trading.

After all, you will be using the two shoulders pattern in your retail investor accounts in the forex market. Now, trading on the Forex market usually takes place between two entities: traders can exchange currencies with other traders, or with a large financial institution like a bank.

Ranked most comprehensive by Investopedia and Best by Benzinga. Free to Try! Yes, the Foreign Exchange market deals mainly with currencies from across the world, there are forex derivatives that give you exposure to the market from anywhere.

A derivative is basically a financial instrument whose value to determined by the value of an underlying asset. In this case, the underlying asset will be a currency pair. Derivatives are offered by many online brokers. But before you get in, please note that these are leveraged products that come with a significant risk of losing money rapidly.

If you are new to all this, make sure you get advanced knowledge and info about forex trading for technical traders and so much more. So you have made up your mind to be a Forex trader. You have got everything set up, and you are ready the enter the huge world of currency trading. However, making sensible investments that would help you grow your money is difficult, especially in current times when more and more people are aspiring to establish themselves as the next big thing in the world of Forex traders.

If you want to make sure that you are sensible investment decisions , it is vital to gain knowledge of the market, and the currency pairs that are more likely to give higher RoI or Returns on Investment. Technical analysis is a skill set that is considered to be a must-have if you want to venture into the Forex trading world. Technical analysis is what helps good traders become great traders. Now, there are multiple techniques used in the technical analysis.

The head and shoulders pattern strategy is very common , and one of the most popular trading approaches amongst Forex traders. One of the major reasons why these Head and Shoulders Patters are so popular amongst Forex traders is that they are highly effective, highly accurate, and they are not difficult to understand, even for beginners. The Head and Shoulders pattern tries to identify a trend reversal pattern for a given currency pair.

So what exactly is trend reversal? So, in most cases, currency trading pairs will have upward and downward price movements. When the price has gone up or down consistently over a period of time, that pair is said to be on a trend.

But trend reversals in price charts are very common. This simply referred to a stage in the trend line where the pair will reverse the general movement and retreat. The Head and Shoulder strategy is designed to help traders identify this reversal and pick good entry points to short trade or long trade.

So in essence, a head and shoulders pattern will appear if the market is about to reverse trends. As long as you pick the right entry point over the blue horizontal line and middle peak, you are likely to make decent returns with it.

It is also possible to use several trading solutions or software to identify and execute a shoulder pattern with the right breakout price.

Trend reversal is an extremely common phenomenon in the Forex market primarily because the Forex market remains open for 24 hours a day, and there is always someone in the world who has his eyes set on any currency pair.

It goes without saying that you cannot keep a watch on the Forex market 24 hours a day, and it is possible that the price of a currency pair might change drastically during the time you were off the market. Thus trend reversal is one of the major factors involved in the Forex market.

Before we can start discussing how to use the Head and Shoulders pattern, it is vital to know how do these shoulder patterns look like. Following is an image that depicts a common Head and Shoulders Pattern graph used by Forex traders. Just like the regular head and shoulders graphs, there also exists an inverse head and shoulders graph.

It would be safe to say that the Inverse Head and Shoulders graph is just an inverted head and shoulders graph. Neckline is a crucial part of any head and shoulders graph for a number of reasons.

The neckline of a head and shoulders graph provides resistance or support to a trader thanks to which they can figure out several strategic areas where they can place their orders. If you want to master the head and shoulders strategy, it is important that you know how to place these Necklines. Once you have located these three attributes , connect the low created just after the left shoulder, and connect it with the low generated just next to the head.

One of the most important rules you always have to remember when trading using the Head and Shoulders charts is that you have to be patient. The Head and Shoulders charts take some time to develop completely, and you should ideally place your bets once the chart has developed completely, and you have analyzed it properly. Now it goes without saying that you should analyze the graph while it is under development , but the final decision needs to be made only after the chart has been developed completely.

Once the chart has been developed completely, you need to create a neckline , using the steps we discussed in the earlier section. Once done, you can start placing your bets on the Forex market using the head and shoulders patterns. However, before you begin, there are two fundamentals that you need to memorize with your heart. For a lot of traders, the common entry point is the instant when the breakout occurs. A breakout simply means a situation when the price of an asset here the currency pair moves above the resistance area, or it drops below the support area.

This is when the neckline is broken, and you make the trade. This method is a more conservative approach, as it requires a lot of patience, and if the currency pair resumes it original breakout direction instead of the pullback direction, then you might miss the trade opportunity. Knowing where and when to place your stops is another crucial factor of the head and shoulders chart patterns graphs.

Most of the Forex traders usually place their stops just above the right shoulder of the graph which is the point where the neckline is just penetrated.

However, it is not a rule, and you can also place your stops at the head of the shoulders pattern graph. However, placing your stops at the head is considered to be an extremely risky affair, and the risk to reward ratio when you are placing your stops at the head is increased significantly.

The chart patterns on the right shoulder or left shoulder are simple tools that allow you to identify a trend reversal. So, they can not tell you the exact way the market will move. There are two main trends in the forex market that can be predicted by the head and shoulder patterns.

This includes the bullish trend and the bearish trend. So, what does a bullish chart pattern look like? Well, this pattern has three main troughs. Here, the central low point which is the head will be the lowest. The other 2 shoulders will be roughly equal. Think of it as a human head with shoulders on both sides. However, instead of standing upright, the head will be inverted. When this happens, it suggests that the market is going to have a bullish trend.

The bearish head and shoulder pattern is the exact opposite. Again, think of it as a human head with the shoulder on both sides. But instead of the head being inverted as it is in the bullish chart patterns, the head will be upright in a bearish trend. In essence, the head will represent the highest price of the currency pair at that given moment. The short answer is yes, the head and shoulders chart pattern works.

Technical analysis is a good way to understand the direction of the market. But even with advanced technical analysis pattern tools for helping you with the head and shoulders pattern, forex markets are very volatile and as such, there may be some occasions where the strategy will not hit the profit target.

The good news is that the head and shoulders pattern strategy is a classic analysis tool that has been used by so many traders over the years. It is an effective way of identifying trends in the market and making the most out of them.

There are however some limitations when it comes to head and shoulders patterns. First, this is a highly sophisticated trading approach that may not be ideal for beginners. Also, it is important to note that the head and shoulders bottom analysis is simply a tool to identify a trend.

It does not constitute investment advice and you must decide how much capital you are willing to risk at any given time. Different people have different profit targets when they use this strategy in trading forex. There are however three crucial things to keep in mind if you want to make money using this trading strategy.

The first thing is to know what your profit target is. However, it is also important to ride out a trend for as long as possible. Secondly, always include a stop loss. Sometimes the price falls even if the head and shoulders pattern showed a bullish run. It could be because of underlying fundamental factors like geopolitics or shocks in the economy. With a stop loss in place, you will easily protect your capital in case the trade goes against you.

Finally, it is also important to understand basic capital management. This means that even if the price target is not hit and you end up losing trades, there will still be enough money in your trading account to make a comeback. As you would expect from any trading strategy, the head and shoulders pattern has several pros and cons that you should know about.

Here is the full list starting with the pros:. Investing in the Forex market might seem to be a daunting task especially if you are a beginner , and have just started exploring the Forex market. Although experience is said to be the best teacher when dealing in the Forex market, it is good to learn about the Forex market briefly before making your first investment. There are several ways in which you can start expanding your knowledge of the stock market.

You can either start reading books or ask for tips from your friends or family members who have prior experience of trading on the Forex platform. However, the former is a time-consuming method while the latter is not always a credible learning source. If you want to learn about investing in the Forex market that would help you gain knowledge , and tell you all you need to know about the market, then you can opt for some professional courses available on the internet.

These courses are developed by Forex markets experts who have years of training Forex traders. Now, there are thousands of courses on the internet that claim to teach you about Forex investment. However, not all of these courses are reliable and give accurate information. Asia forex mentor course by Ezekiel is by far one of the best Forex learning courses on the internet , and they are one of the best learning sources if you want to expand your Forex trading knowledge.

They have been featured on multiple different leading forex platforms and Forex events happening around the world. It is the number one course available on the internet because it also reaches new bank traders and has fun managing if you want to make money from trading forex stocks and other commodities. You can get a great return on investment by indulging yourself in this systematic course. Even if you are a beginner in the field and do not have enough experience and knowledge about Forex trading, you still join this program with zero knowledge.

Everything will be taught to you from scratch, and you can enroll yourself in this program right now to get started. Check out the testimonials on the website and start your Forex trading journey right away. The good thing about this course is that you will be crystal clear about what you need to do from day one.

They are using a return on investment approach to teaching their students. It is a scientific method of beating the market, and you will not be taught this somewhere else. Overall Broker Read Review. The Head and Shoulders strategy is one of the most popular technical analysis methods followed by Forex traders , and there are several advantages of using these graphs with shoulder patterns.

In this article, we have told you everything you need to know about the Head and Shoulders pattern graphs. We first introduced these graphs to you, and we discussed why are they called so. Then we told you how to read these graphs and some of the rules that you must follow when using the Head and Shoulders strategy for trading on the Foreign currency market.

Then we discussed how to trade on the Forex market using the Head and Shoulders patterns graphs. TO finish things off, we discussed the Pros and Cons of these graph patterns. The Head and shoulders formation is one of the must-have skills for any Forex trader , especially if you want to make a name for yourself in the Forex market. To be honest, Yes , the head and shoulders chart pattern works. However, it is worth noting that it is not a magical graph that would make accurate predictions for you.

The Shoulders trading pattern graphs can only help you analyze the trends displayed by a particular currency pair, and only you can make the decisions based on the findings of these graphs. Although the Head and Shoulders pattern is easy to understand, using it is not as simple as you would assume.

The head and shoulders pattern strategy are very common, and one of the most popular tradings approaches amongst Forex traders. The Head and Shoulders strategy is said to be one of the most dependable technical analysis strategies that you can learn, and it would help you make better decisions most of the time. Even if you think that you learned everything about the Head and Shoulders graph, you might mess up the first few investments because learning and experience are different aspects.

However, as you gain experience, and continue using the Head and Shoulders graphs, you would make better decisions with each passing day, and its success rate would shoot up significantly for you.

Wilbert is an avid researcher and is deeply passionate about finance and health. When he's not working, he writes research and review articles by doing a thorough analysis on the products based on personal experience, user reviews and feedbacks from forums, quora, reddit, trustpilot amongst others. Your email address will not be published.

Save my name, email, and website in this browser for the next time I comment. The forex market is incredibly volatile and confusing, to a large extent, and even seasoned traders sometimes struggle to make headway in it.

There are a lot of factors and components involved in trading forex. Forex brokers are an important and inevitable aspect of trading the currency market. Find out how to read forex charts. This article outlines some basic concepts of the forex market and provides you with a solid foundation for understanding its structure. If you want to trade in forex, the first step is figuring out how.

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Best Forex Screeners. Best Cryptocurrency Brokers. Best Cryptocurrency Exchange. Best Cryptocurrency Apps. At this point, the market moves down to form a higher low. This gives a peak, which is the left shoulder.

It then moves down and forms another low. This completes the head structure. At this point, we have the left shoulder and the head of the structure. The pattern is now starting to take shape. The advance from the low of the head forms the right shoulder. This peak is lower than the head a lower high. At this point, the pattern structure is clear. But one main part missing: The Neckline. This level will become a key component when we get into how to trade the breakout. The neckline is drawn by connecting low points A and B.

Low point B marks the end of the head and the beginning of the right shoulder. Typically the neckline is not horizontal. The psychology in every pattern is a shift in strength between the buyers and the sellers. In the head and shoulders, the buyers are tiring. That means we are having a change of power from buyers to sellers. The prior uptrend indicates a lot of strength in the buyers, pushing prices higher.

As the buyers are tiring, there is a general shift of power from the buyers to the sellers. At this point, prices start to fall as more sellers come in. this is how the left shoulder gets to be formed. At the low of the left shoulder, we have more buyers who are not yet convinced of the falling prices and take advantage of falling prices to buy more.

This leads to prices pushing even much higher to form the tip of the head. Most of the buyers exit their positions, which causes a lot of panic selling that completes the head structure. So if you just bought at the tip of the head, you would now get trapped. At the low of the head, a few buyers take advantage of the low prices.

This causes a slight rise in the prices up to the tip of the right shoulder. Remember, we are having very few buyers in the market this time.

So the right shoulder is fully formed when almost all the remaining buyers exit positions, and now more sellers enter the market, pushing prices lower.

Now we are at the point where we are in the neckline zone, waiting for the breakout. We need to start by knowing what qualifies as an actual breakout.

A real break out is when the candle closes below the neckline , and I mean close below the neckline, not just the tail touching. Now that we know what an actual breakout looks like let us see how to enter trades following the head and shoulder pattern. Now, this is the fun part — how to trade and, of course, profit from a head and shoulders reversal. There are two significant ways how you can enter a trade on a header and shoulders breakout; An aggressive entry and a Conservative entry.

An aggressive way to enter the head and shoulders is to enter as soon as the candle breaks through and closes below the neckline. Just as shown at Sell 1 entry. A more conservative way of trading the neckline break is to wait until the price has broken through the neckline and then retested from the other side as resistance.

Just as shown on Sell 2 entry. This is based on the fact that broken support becomes new resistance and vice versa. So when the candle closes below the neckline. Wait for the price to come back to the neckline for a retest and find resistance, then you can enter a sell position. This combination is why I almost always opt for the conservative method.

Of course, there is a greater chance of missing an entry by waiting, but the potential reward for doing so is equally significant. Take a look at another example on how to make entries on forex head and shoulders below on the AUDUSD, H4.

There are two ways of setting stop losses that I will share with you here.

The head and shoulders is a formation on your chart that shows the reversal of an up-trending market. The head and shoulders is a chart pattern that shows when the uptrend is running out of steam. The pattern occurs when the price makes a sequence of three peaks. The second peak is higher than the first and the third, which gives the pattern its distinctive appearance.

The second peak is the head because it is the highest of all three. The first and the third peaks are the shoulders, which are located roughly at the same price level. The head and shoulders pattern is completed when the price falls below the neckline after forming the right shoulder.

Obviously not all patterns succeed; there are many failed head and shoulders patterns, which highlights the importance of risk management. Usually, it is a good idea to incorporate more than one technical signal into your strategy to find high probability set-ups. Naturally, the formation of the pattern begins with an uptrend.

This can be problematic in itself because it requires you to make a decision on what constitutes as a trend. In an uptrend, each successive peak and trough is higher than the ones found earlier in the trend. Now if you look at the picture above, the trend looks strong and there are no warning signs. What would need to happen to begin worrying about a possible reversal? If you said that the pattern of higher highs and higher lows must break somehow, you are right!

Notice that the market has already surpassed its previous high, so only one thing can go wrong: The market failing to establish a higher low. When that happens, you know that something is not okay with the trend. In fact, you can spot an emerging head and shoulders pattern on the chart. In this scenario you should be moving forward on high alert even though the likelihood of a reversal is uncertain.

The trend may be entering a sideways movement and then surpass its previous high the head and continue forward. When this happens the head and shoulders are clearly visible and a sell signal is about to occur.

Nevertheless, we need one last piece of confirmation: the price must fall below the neckline, which is the price line that connects the troughs. The reason we must wait for the price to fall below the neckline is because despite the head and shoulders forex pattern having emerged, the market can continue moving sideways instead of reversing.

Remember that as a trader, you consistently look for ways to tilt the odds in your favor. Aligning your moves with shifting market conditions is a good starting point. In an inverse head and shoulders pattern the formation is inverted and all the above principles apply in the reverse direction.

We put together a simple checklist that you can use to easily identify the best head and shoulders patterns. Now that you have the head and shoulders pattern rules you can always reference them to validate a pattern you are unsure of!

Entering the head and shoulders pattern trade is rather straightforward. Following the general guidelines, you can enter a position once the price breaks below the neckline. Most people wait until the candle closes for the period and then they will open a position. For example, if someone is looking at the 4-hour chart, they might wait until the 4-hour candle closes. Then if the market opens below the neckline in the next period, they will enter with a short position.

This simplicity is due to the fact that currencies are traded in pairs and every trade involves a simultaneous long and short position.

The process is more complicated for stock traders because before they can short a stock, they must borrow it from their broker. The borrowed stock is then sold on the market and later repurchased in order to return it to the broker.

Almost every trader will place a stop loss order to protect themselves from adverse price movements. We highly recommend that you do the same. If you prefer a tight stop, use the price level slightly above the breakout candle. If you want to leave a bit more breathing room for your trade, consider placing your stop loss above the head.

This will decrease the likelihood that your position will be stopped out prematurely, but you will need to decrease the position size to keep risking the same percentage as you would with a tight stop. To find the head and shoulder target price, first measure the distance between the head and the neckline. Next, take this distance and subtract it from the neckline breakout level to arrive at the profit target. We usually subtract the height of the pattern from the price level at the close of the breakout candlestick, not from the price level of the neckline, but you can do it either way.

Another way to calculate the profit target is to choose an exit point based on the market structure. This requires more experience as you need to be able to estimate how far the new trend might travel and where it might change direction. For instance, carry traders specialize in buying high yielding currencies with low yielding currencies. If a head and shoulders pattern allows them to get into such a position, they will try to stay in it as long as possible because the interest rate differential will be deposited in their trading account every day by the broker.

You can do whatever works for you. With losses largely left unmentioned, anyone who trades head and shoulders patterns will quickly realize that failure is quite common. First, the pattern began unfolding after an extended run up in prices. Then, there were long upside wicks at the left shoulder and head showing that the market struggled to advance beyond these high prices. Finally, the price broke below the neckline with a strong bearish candle. Despite being a seemingly perfect opportunity to go short, if you had sold the market at this point, you would have suffered a loss.

Your stop would have been triggered even if you had placed it if far from the entry price. Head and shoulders are no silver bullet. None of them are particularly up-to-date, but arguably not much has changed about how people trade chart patterns.

The first study was conducted by no other than the Federal Reserve Bank of New York. The researchers from the FED evaluated the predictive power of the head and shoulders pattern from March to June In essence, they found that trading head and shoulders patterns would have been significantly profitable if one had speculated in multiple currencies simultaneously during the investigated time period.

The second study we found was one that appeared in Applied Economics in Unfortunately, this study is not free but the abstract is quite telling:. For various combinations of the building blocks of head-and-shoulder definitions the result is generally negative: returns to head-and-shoulder trading rules are not significantly positive —and if there is any evidence for non-zero returns at all, then it is evidence for negative returns.

The answer is: you must figure it out yourself through backtesting. Studies seem to forget that chart patterns are not high-probability signals on their own. These types of patterns are merely frameworks that help bring structure to the market, manage risk, and project potential profits. Also called head and shoulders bottom, the inverse head and shoulders pattern is simply the opposite of the traditional head and shoulders.

This means that the defining criteria, as well as the entry rules and profit target rules, are all reversed. Inverse head and shoulders patterns occur following a downtrend. Their primary characteristic is a sequence of three troughs with the lowest in the middle. The inverse head and shoulders pattern is complete when the price crosses the neckline after forming the right shoulder. In addition to these basic features, there are a few criteria you should keep in mind when spotting inverse head and shoulders patterns:.

Of course, all inverse head and shoulders patterns exhibit some diversity. Individual situations can vary, but you should keep these points in mind as general guidelines.

The head and shoulders pattern can foreshadow the impending reversal of a rising market, so you want to be on high alert when market conditions change. Heads and shoulders patterns form when the market stops making higher highs and higher lows the primary characteristic of an uptrend , and begins making lower highs and lower lows the primary characteristic of a downtrend.

The way you use this information is up to you. If you bought the currency pair previously, you might consider taking profits. That way, even if you run into a failed head and shoulders pattern, the loss will be cut off before it could turn into a serious threat to your trading account.

What is the Head and Shoulders Forex Pattern? Head and Shoulders Pattern Rules Head and Shoulders Pattern Entry Head and Shoulders Pattern Target Failed Head and Shoulders Patterns How Profitable are Head and Shoulders Patterns? Should You Trade Them? Using Double Top and Double Bottom Forex Patterns to Trade Reversals. Crypto Trading vs. Forex Trading: How Do They Compare Against Each Other? Want the inside scoop? JOIN THE COMMUNITY. Subscribe to get Forex education materials delivered to your inbox once a week.

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But what is it about the pattern that causes the market to reverse? Note that those who use this method are not waiting for the market to close below the neckline. Best Weight Loss Supplements Best Fat-Burning Supplements Best Hair Supplements Best Vision Supplements Best Memory Supplements Best Natural Testosterone Boosters Best Joint-Pain Relief Supplements. Knowing where and when to place your stops is another crucial factor of the head and shoulders chart patterns graphs. Prudent traders will stop their trade outs when a failure happens — even if it means taking a loss. Best UK Brokers 5 Best UK MetaTrader 5 MT5 Brokers List 5 Best UK MetaTrader 4 MT4 Brokers List 5 Best UK Stock Brokers List for 5 Best UK Forex Brokers List for You can then place your take-profit level just before the measuring objective level you calculated.

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