How to Trade the Pattern It's important that traders wait for the pattern to complete. This is so because a pattern may not develop at all or a partially developed pattern may not complete in the future. Partial or nearly completed patterns should be watched, but no trades should be made until the pattern breaks the neckline.
In the head and shoulders pattern, we are waiting for price action to move lower than the neckline after the peak of the right shoulder. For the inverse head and shoulders , we wait for price movement above the neckline after the right shoulder is formed.
A trade can be initiated when the pattern completes. Plan the trade beforehand, writing down the entry, stops, and profit targets as well as noting any variables that will change your stop or profit target.
The most common entry point is when a breakout occurs—the neckline is broken and a trade is taken. Another entry point requires more patience and comes with the possibility that the move may be missed altogether. This method involves waiting for a pullback to the neckline after a breakout has already occurred. This is more conservative in that we can see if the pullback stops and the original breakout direction resumes, the trade may be missed if the price keeps moving in the breakout direction. Both methods are shown below.