VincePrince
Education

How To Trade Classical Head And Shoulder Formations.

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
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Hello Traders Investors And Community.


Welcome to this idea about the classical head and shoulder top formation which can be found on smaller timeframes as also higher timeframes.
Although there are inverted head and shoulder formations and formations which brake to the upside than to the downside there are often failures in these
formations whereas this is the classical formation confirming the reversal with volume and the activated price-target with a high probability.
The formation can be divided into 5 phases with each phase confirming the ongoing formation and besides that minor phases and major phases which
increasing the possibility for the head and shoulder formation to form the final breakout and confirmation.
The formation can be traded in several ways where the most common ways are either with the final confirmation or before the final confirmation, both
with different risk-preferences and fitting to each trader individual approach.
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Confirmational Phases

1.) Buying Climax On High Volume
2.) Consolidation And Declining Volume Upside Attempt
3.) Upward Breakout With Lower Volume To Prior Climax High
4.) Another Consolidation Like (3.) With High Declining Volume
5.) Neckline Forming By Lowest Point With Following Breakout
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First Phase:
Up to this point a strong upward breakout is reaching up to new highs with increased volume , this looks just like a continuation of the priors established
uptrend till bearish pressure sets in and the first signs of weakness showing a possible stopping of the uptrend with firstly declining volume .

Second Phase:
In this phase, the price forms a consolidation zone which can look like a bull-flag or triangle in decreasing volume before it shows an upside breakout on
low volume , this is also forming the overall left shoulder and the established channel can be used for the ongoing measured right shoulder.

Third Phase:
This is an important phase and the key point of the formation where another upside attempt follows with significantly decreased volume forming the
head before showing a markdown with still lower volume marking weakness of the bulls and a continuation of the head and shoulder formation.

Fourth Phase:
This is the last attempt to form new highs in the structure with lower volume compared to the phases before and normally low momentum showing
the increased weakness of the bulls before the initial markdown shows up and set up for the final breakout confirmation in the fifth phase.

Fifth Phase:
The final confirmation the fifth phase showing the break of the prior established neckline and therefore the last confirmation point where a breakout
happens with high bearish volume confirming the following moves to the downside and activating the overall head and shoulder downside target.
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Trading Approaches

A.) Trade The Final Confirmation
B.) Trade The Right Shoulder Forming

Trade The Final Confirmation:
In this approach, a trade on the short-side is placed when the dip down of the right shoulder penetrates the neckline which is confirming the overall
formation, the stop-loss is placed above the right shoulder, a variation of this is to sell short when the right shoulder has finally broken the neckline
to the downside but as this move can be volatile and fast it has to be done before the selling pressure sets in, the minimum target is the price
projection from the high at the head of the formation to the neckline measured from the breakout to the downside.

Trade The Right Shoulder Forming:
This is the more speculative variation but can result in a good risk-reward and profit potential, in this scenario the trade is placed when the head
with low volume has formed, price touched the neckline and the head of the right shoulder is forming on decreased volume , the stop-loss will be
placed above the head of the formation or above the right shoulder. Placing the stop above the head of the formation in this variation will be the
more logical and conservative approach, the targets in this variation are the same like in the first one with price projection of final confirmation.
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When spotted right and traded in the mentioned manner the trade of this formation can lead to a good profit. Also, the volume is playing a major role
in this formation, although it can vary in some cases it will add to a high probable trading setup on the short-side. There are other variations of the
head and shoulder formation but they arent that accurate in the approach like the classical head and shoulder top formation pointed out here.
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In this manner, thank you for watching, support for more tutorials and a good day!
trading effectively is about assessing possibilities not certainties

Information provided is only educational and should not be used to take action in the markets.
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Comments

Hi! thanks for the chart.
Question:
Based in your experience: Once the right shoulder touches the neckline... What is the percent of breaks to the down side? % of effectiveness?
Any prefered timeframe or currency or stock?
Thanks!
+3 Reply
VincePrince JonathanOrrego
@JonathanOrrego, Hi thank you very much, interesting question, the right should should take the approximate time to develop like the left shoulder, when all criteria matches the probability is high. Greetings.
Reply
Nice work.
+3 Reply
VincePrince Futureboy2814
@Futureboy2814, Thank you
Reply
Thank you for a well detailed explanation.

I prefer to Trade the right shoulder forming.
An addition odds enhancer to your suggestion on volume is that if the Right shoulder forms in a resistance / supply zone it is a lot more reliable.
+2 Reply
VincePrince Lifesong
@Lifesong, Thanks for your weighty thought, right there can be other factors which validate the formation, you are welcome. Greetings.
Reply
Thank you for sharing...very insightful
+1 Reply
VincePrince TheEyeDr
@TheEyeDr, Thank you very much.
Reply
Thank you for sharing @VincePrince appreciate it..
+1 Reply
VincePrince PULEMokhothu
@PULEMokhothu, Thank you buddy, all the best.
Reply
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