A Head and Shoulders pattern is considered to be a major reversal chart pattern in a strong up trending currency market. The trading pattern is formed by three tops (left shoulder, head and right shoulder) and a neckline connecting the temporary lows.
The pattern is confirmed on a sustained break of the neckline after the right shoulder has been formed. The neckline provides support and can slope up, slope down or be horizontal. Stop losses are usually placed above the right shoulder.
Forex Head & Shoulders Chart Pattern Example (GBP/USD 4 Hour Chart)
Forex Head and Shoulders Trading Ideas
Conservative forex traders: wait for a sustained break of the neckline.
Aggressive forex traders: sell in the vicinity of the right shoulder. Look for bearish reversal candlestick patterns or overbought signals from RSI, Stoch,.. to enter a low risk – high reward trade.
Tip: After a sustained break of the neckline (which now acts as resistance), a small retracement back to the neckline is very common. Go short in the vicinity of the neckline with a stop loss placed a few pips above the neckline. Use bearish candlestick patterns to confirm the short trade.