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Chapter 14, Part III. Head and Shoulders pattern. Page 3

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

    Aug 28, 2009
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    But I have to warn you that you hardly ever will see absolutely perfect example of H&S pattern during your trading experience. As a rule, H&S pattern has some lacks and I have to say that our example is very close to the perfect shape.

    Pipruit: So, does it mean that sometimes I will not be able even recognize it?
    Commander in Pips: Well, yes, I can’t exclude that. The major assistance here is your experience. Initially you will be able to see only near perfect H&S patterns, but later you will be able to recognize blur examples. It’s normal.

    Trading of H&S Pattern

    The classic approach to trading a H&S pattern suggests that we should enter when the market breaks through the neckline. Stop could be placed in two ways – conservative – right beyond the head, according to failure rule, or just above/below right shoulder. The second way seems more logical, because, if market has shown breakout through neckline and a confirmed H&S pattern returns right back and moves above/below the right shoulder, then this fact already tells that something is wrong. Stop placing beyond the head seems very conservative, besides, this puts under question the attractiveness of such a trade, depending on the profit objective.

    Now about the target – the classical approach suggests that the target of H&S is the distance from he neckline that equals the distance between the head and neckline. Look at chart #3 – here you can see all the classic issues. By the way – the retracement of shoulders is almost perfect 0.618 one from the head swing.

    Chart #3 | JPY/USD Futures Weekly. Reverse Head & Shoulders pattern

    It’s not forbidden to trade H&S and Reverse H&S pattern in classic manner, but I have to warn you that you will meet with multiple cases when one or another rule will not hold. First of all, it is subject to targets of the pattern and a higher degree of nervousness at neckline breakout point - almost the same stuff as with Double Top/Bottom pattern. And here I want to ask you – what for we will have to suffer it?
    #1 Sive Morten, Dec 21, 2013
    Lasted edited by : Mar 27, 2016
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