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Chapter 14, Part III. Head and Shoulders pattern. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Chart #1 | JPY/USD Futures Weekly. Reverse Head & Shoulders pattern
    [​IMG]

    Refresh in memory what we’ve talked about trading of failed W-bottoms in previous chapter – and here you can see how it could be in reality. H&S has almost the same classical approach to confirmation and failing points. But the difference to Double Top/bottom is that it has not just one low/high between tops/bottoms but two, because H&S has three tops/bottoms. That’s why the neck line of H&S almost all the time is not horizontal (like we have here still) but has some slope angle. The pattern treated as confirmed if the market breaks the neckline and shows close above it for Reverse H&S and below it for just H&S.

    The pattern is treated as failed if he market shows close beyond the Head’s extreme. In our case it should show a close below the Head’s low.

    Some features of H&S that are preferable to see:

    1. The harmony in H&S pattern has huge importance. This harmony should be not only in price swings but in time also:

    - It is preferable if Head is a 1.618 or 1.272 Fib extension of shoulders, and the height of shoulders is almost equal;

    - It is preferable that time of shoulders forming is the same for both of them. In our example we can see, that right shoulder is formed a bit longer. If both shoulders form during almost the same time – much better;

    2. Normal retracement of right shoulder to the head is 0.618-0.786, so as left shoulder. If right shoulder shows only, say, 0.382 - 0.5 retracement – it tells that bearish power is strong and H&S pattern is more significant. The same is for Reverse H&S – shallow retracement of right shoulder to head tells about bull’s strength.

    3. It is preferable that the neckline has downward slope with H&S and upward slope with Reverse H&S. Although it could be horizon as with our example.


    Let’s check our pattern then:


    Chart #2 | JPY/USD Futures Weekly. Reverse Head & Shoulders pattern
    [​IMG]
    Pipruit: Well, Commander, I see that our example is perfect in all aspects, except just one – shoulders forming time…
    Commander in Pips: Yes, you’re right. Both shoulders are equal in depth; the head is almost precisely at a 1.618 extension of the shoulders, even the low of the right shoulder has the same distance from the head as the left shoulder in terms of time. The single lack is that right shoulder lasts too long until the confirmation point, so it appears that it was a longer time for forming.
     
    #1 Sive Morten, Dec 21, 2013
    Lasted edited by : Mar 27, 2016
    fran alvarez likes this.
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