📍How to Identify and Use the Head and Shoulders Pattern The head and shoulders pattern is characterized by key features to look out for on trading charts. It typically occurs after a bullish uptrend when buying pressure begins to fade. The pattern includes a left shoulder, a higher middle peak, and a right shoulder approximately at the same level as the left shoulder. Additionally, the pattern should have a distinct neckline acting as a support level.
✔️To successfully identify and trade the head and shoulders pattern, consider the following step-by-step approach:
🔹 Look for three distinct tops, namely the left shoulder, head, and right shoulder, which occur after an uptrend. 🔹 Identify the neckline support level, which connects the lowest points of the left and right shoulders. 🔹 Wait for a breakout to occur, confirmed by a candle closing below the neckline. 🔹 Once the breakout is confirmed, place a selling order to capitalize on the bearish reversal signaled by the pattern. 🔹 Implement a stop-loss order above the neckline, ideally positioned at the highest level of the right shoulder, to manage risk effectively. 🔹 Consider using a risk-reward ratio to determine a suitable target for taking profits, ensuring the potential reward justifies the risk taken.
Lets consider the following example below as a step by step to identify the pattern. This is what it would look like in a real scenario:
Step 1: Price is moving on an uptrend and starting to form the head and shoulder peaks
Step 2: We can identify the neckline which we can observe price react as a temporary support which connects the lower peaks. We need to wait for a clear breakout in order to find an entry
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Step 3: Price broke below the neckline and re-tested the neckline so we enter a short position on the re-test with taking profit target the length of the head to neckline
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Step 4: We can see the pattern was correct and it hit our targets
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@QuantVue sometimes when i post ideas I have a issue with scaling where the chart and design looks good on my chart but once I make it public it has been distorted. Was wondering if you also have this issue and if you have any tips to avoid the issue.
QuantVue
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@ChristopherDownie, Try using smaller fonts, stretch it and shrink the browser to see how it adjusts