Head And Shoulders

Head and shoulders and inversed head and shoulders are reversal patterns and they are one of the most common reversal patterns that can be seen on virtually any currency pair and time frame.

They are having three components, a head and two shoulders, the left and the right one. Shoulders are consolidation area price makes before a spike (and the spike usually is the head) and after it. A line (not necessarily horizontal, as currency markets often give heratic moves due to it being driven mainly by news flows/algorithms trading/high frequency trading) drawn from the top of the left shoulder until the top of the right shoulder in case of an inversed head and shoulders pattern it is being called neckline and this is the line that defines the whole pattern. Measured move for the head and shoulders pattern is the distance price travels from the top/bottom of the head, meaning the spike for the head, till the neckline, projected after the neckline is being broken. The higher the time frame, the powerful the pattern is.

A couple of examples of head and shoulders and inversed head and shoulders patterns are being presented on the recording that goes with this sub-chapter as well as how to correctly draw a neckline and project the measured move of the pattern.

One important thing is that usually after the neckline it is being broken, a re-test is coming. But this is not mandatory and often traders wait for the neckline to be re-tested only to find out this would not come. However, this does not invalidate the pattern.

As a trick/tip to take with you for this pattern, look for the head and shoulders pattern that show a correlation (time, amplitude, severity of the move, demand levels, etc) between the two shoulders to be the most powerful patterns, regardless the time frame.

Book recommendation: Martin J. Pring, “Technical Analysis Explained”, Feb 20, 2002