DavidWaring

As we have learned in previous lessons, double tops and double bottoms are forex, futures and stock chart patterns which show that the momentum needed to break a specific level of resistance for the double top and support for the double bottom is not there. When these patterns show up on a stock, futures or forex chart day traders will look for a reversal of the current trend.

In this lesson we are going to look at a chart pattern which also shows that the momentum needed to break a support or resistance level is slowing which is known as the head and shoulders pattern and the reverse head and shoulders pattern. Once we have a sound understanding of how to spot these patterns we will then look at a specific strategy for trading these patterns when they appear on a chart.

A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern.
Head

Head and Shoulders Example:


As you can see from the above chart a head and shoulders pattern is basically showing the buyers trying 3 times unsuccessfully to take the market higher before finally giving way to the sellers who theoretically retain control after the 3rd failure. The head and shoulders pattern is thus seen as a potential reversal pattern and day traders will pay special attention to this pattern when it occurs on an uptrend, and will look to trade a potential reversal of the uptrend should the pattern play out. For further confirmation that the potential for a reversal is high traders often give more credibility to a falling neckline than they do a rising neckline.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern and is defined by one trough, followed by a second lower trough, which is then followed by a third higher trough, and then finally a break above the resistance level established by the two peaks formed by the pattern.

Reverse Head and Shoulders Example:


As you can see from the above chart, the reverse head and shoulders is basically showing the sellers trying 3 times unsuccessfully to take the market lower before finally giving into the buyers who theoretically retain control after the 3rd failure. Like the Head and Shoulders Pattern, the Reverse Head and Shoulders is seen as a reversal pattern, and traders of the stock, futures and forex markets will pay special attention to this pattern when it occurs as part of a downtrend should the pattern play out. For further confirmation that the potential for a reversal is high, day traders will look for a rising neckline.

You should now have a good understanding of Head and Shoulders Patterns and Reverse Head and Shoulders patterns. In our next lesson we are going to look at a specific strategy which traders commonly use to trade the head and shoulders and reverse head and shoulders complete with how to determine exact entry and exit points.

Other Links to Help You Learn About the Head and Shoulders Pattern

Head and Shoulders
Head and Shoulders Pattern -- A complete definition
Head and Shoulders Pattern on Trending123.com

So we hope to see you in that lesson. As always if you have any questions or comments please feel free to leave them in the comments section below, and have a great day!

purnalata

Thanks for good and simplified explanation of fundamental charts

David Waring

Hi Purnalata,

Thanks for the comment I am glad you like the lesson and welcome to the community.

Best Regards,
Dave

tam

Hi Dave,

First of all, I want to thanks God that I found this website.
And secondly, I want to thank you for putting all this together.

A wonderful website with a wonderful host.

The information here are 200% useful.

Best regards,
Tam

David Waring

Hi Tam,

Glad to hear from you and welcome to the community. Also thank you for your kind words I am glad you like the site.

Best Regards,
Dave

Unregistered

Hi David

I am starting to get somewhat addicted to these lessons, much to the dismay of my girlfriend - thanks for your time and for your effort on these.

Regarding the head and shoulders example, the (decapitator) neckline appears to be drawn from the wick of the left candle to the lower body of the right candle.

When ever we are drawing trend and necklines, should we be using the wicks or the upper and lower bodies of the candles.

Thank you

Marz

David Waring

Hey Marz,

My pleasure and thanks for the comment and yes I am all too familar with the negative reactions of the girlfriends when the market addict side of me kicks in.

The question of where to put a support or resistance line whether that be a trendline, part of a pattern like this one, or just a horizontal support or resistance line is one that comes up fairly often. Like with most things in technical analysis there are many different ways to do things.

Some traders feel that things need to be as consistant and formulamatic as possible. Traders who fall into this category tend to use either the top/bottom wicks of the candle or the close of the candle as where they draw in their support and/or resistance lines.

In general I think that traders who use the close instead of the high or low of the candle believe that where a candle closes is a more accurate representation of true market sentiment, than the highs and lows for the period since these can represent short term market noise. I also think that traders who use the close tend to be longer term traders looking at hourly or longer term charts.

I fall into what I feel is the second category of traders that does not think of technical analysis as an exact science but more so as a general guide. As this is the case I really don't pay too much attention in technical patterns like this one as to wether or not the line touches the close or the high/low point of the candle. Instead I draw the line in where it seems to fit the best.

So like I say it is in my opinion just generally a matter of personal preference that traders develop over time.

Hope that helps, feel free to post any other questions or comments.

Best Regards,
Dave

Unregistered

Thanks for this great course!!!!!!!!!!!!!!Greetings from the Netherlands

David Waring

My pleasure thanks for watching.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

themillionaire08

I can tell you that I've read patterns many times and couldn't understand them well before today, actually I was planning to skip the patterns lessons as I hate them but today it's 100% clear.

Thanks David..