The head and shoulders pattern is one of my favorite reversal patterns found in the Forex market. The pattern occurs after an extended move up and signals a possible exhaustion point in the market. This provides an opportunity for traders to look for a short entry once the pattern has been confirmed.
As you can see from the video, the head and shoulders pattern is comprised of five parts. In order of occurrence, those parts are as follows:
1) Uptrend
2) First Shoulder
3) Neckline
4) Head
5) Second Shoulder
The very first part of a head and shoulders pattern is the uptrend. This is the extended move up that breaks a key resistance level. The market then moves down to retest resistance-turned-support. This forms the first shoulder and also establishes neckline support.
Now that the first shoulder has formed, the market makes a higher high (head) but is unable to make a higher low, and soon retests the neckline as support once more. The market makes one more attempt at a rally but falls short as it once again retests the neckline. This forms the second shoulder.
One important thing to keep in mind about the head and shoulders pattern, is that it isn't confirmed until neckline support is broken. A common mistake among Forex traders is thinking that the formation of the second shoulder signals the completion of the pattern, when in fact the pattern shouldn't be considered complete until neckline support is broken.
As you can see from the video, the head and shoulders pattern is comprised of five parts. In order of occurrence, those parts are as follows:
1) Uptrend
2) First Shoulder
3) Neckline
4) Head
5) Second Shoulder
The very first part of a head and shoulders pattern is the uptrend. This is the extended move up that breaks a key resistance level. The market then moves down to retest resistance-turned-support. This forms the first shoulder and also establishes neckline support.
Now that the first shoulder has formed, the market makes a higher high (head) but is unable to make a higher low, and soon retests the neckline as support once more. The market makes one more attempt at a rally but falls short as it once again retests the neckline. This forms the second shoulder.
One important thing to keep in mind about the head and shoulders pattern, is that it isn't confirmed until neckline support is broken. A common mistake among Forex traders is thinking that the formation of the second shoulder signals the completion of the pattern, when in fact the pattern shouldn't be considered complete until neckline support is broken.