The head and shoulders pattern is one of the most common price action reversal patterns you’ll see form in the forex market. It’s a pattern which has been around for ages now and it’s appearance is watched for by millions of forex traders all over the world. Despite it’s popularity it’s a pattern which many traders find causes them to lose money when they try to trade it. The reason I think it causes them to lose money is because they’re trying to trade the pattern in the standard way that it has been traded since it’s inception. This standard way of trading the pattern does not take account the reason why the pattern has formed or why the market should reverse after the pattern has been created.
What I’m going to do in this article is show you a new way of trading the head and shoulders pattern which is based on understanding what’s caused the pattern to form in the market. This new method will not only increase your chances of having a successful trade, but will also drastically decrease the distance of your stop-loss from your entry, allowing you to risk less money on the trade whilst also giving you the opportunity to take the trade at a higher position size.
What Does The Head And Shoulders Pattern Look Like ?
Before I show you this new method of trading the pattern, I want to give you a quick overview of what the head and shoulders pattern is and what it looks like, just in case there are some people reading this who don’t have any prior knowledge of the pattern or what it looks like when it forms on the charts.
The head and shoulders pattern is a bearish reversal pattern that often but not always forms after a long move higher has taken place in the market. It’s falls into the category of price action reversal patterns due to the fact it’s created by the price action we see forming in the market. The reason it’s called a head and shoulders pattern is because of the way the swing structure of the pattern forms in a similar way to that of a person’s head and shoulders.
You can see the structure does kind of resemble a person’s head and shoulders. The basic structure seen above is what all head and shoulder patterns should look like when they f0rm in the market. The head should always be found in the middle, and the two shoulders are always found to be either side. None of the shoulders are ever found be above the head, if you see that they are then the pattern is not a head and shoulders pattern and is instead something completely different. The shoulders can be found slight