Head and Shoulders forex chart pattern, also known as a trend reversal formation, has the following features:
- Left Shoulder – a rise to a peak of a chart, followed by a decline.
- Head – currency price grows up above the left shoulder and then goes down.
- Right Shoulder – final rise to the level of the left shoulder, followed by a decline.
- The neckline – a line which connects the lowest points of the graph.
What should forex trader do in case of this chart formation? The agenda is to make a trade entry order under the neckline of the head and shoulder formation. It is also possible to find out how far the price movement will go by evaluating the distance between the neckline and the head. Whenever the head and shoulder formation occur, the neckline turns into a major support level. The price movement can bounce off the neckline or it can break through and gather momentum.
The successful head and shoulders formation requires a heavy market volume. Keep in mind that it is possible to witness a false breakout of the neckline.
Reverse Head and Shoulders Pattern
Reverse Head and Shoulders pattern is obvious – it’s the same head and shoulders formation we described above, except that it is “up side down”. The reverse version of head and shoulders has following features:
- Left Shoulder - a fall to a low point of a chart, followed by a rise.
- Head - currency price falls down way below the left shoulder and then goes up again.
- Right Shoulder - final fall to the level of the left shoulder, followed by a rise.
- The neckline – a line which connects the highest points of the graph.
The formation usually happens after long downward movements. Your job, as forex trader, is to place a long entry higher than the neckline. To calculate the target, investigate the distance between the head and the neckline. The distance represents the price movement after the breakout from the neckline.