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Chapter 14, Part III. Head and Shoulders pattern. Page 4

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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    Advanced talks on H&S Trading

    First of all, I would like to start with profit objective points. In fact, such kind of targets as classical one, and 1.618 Fib extension from ABC pattern, where A stands for head, B – for high between head and right shoulder and C – for right shoulder treated as “extended” and I can even say as “extreme” targets. Although sometimes, the market could reach it and even exceed it – there is no high probability of that. Possibly it could happen in 15-20% of cases. Our task here is to make profit and not to catch huge moves. So, my preferable targets for trading H&S pattern as follows:

    Chart #4 | JPY/USD Futures Weekly. Reverse Head & Shoulders pattern

    Even here, you can see, that market has not reached the 1.618 extension target so as classical target (that is even higher), despite the fact that the Reverse H&S pattern was near to perfect. That’s why if you use as a target Fib extension that based on head and right shoulder I prefer to use 1.0 extension or 1.272 as maximum. Odds that the market should reach these particular levels is significant. So, you can see it here.

    Also, this is very often happens that around 1.0-1.272 extension targets stand as Fib resistance levels from a previous market swing in opposite direction (in our case down), and they could create Agreements and Confluence resistance areas that the market could not pass through. This is a bit of a delicate topic to cover it here, but just remember that using 1.0-1.272 extension when trading H&S pattern is reasonable.

    The second way to estimate target is to use an extension from total Head swing down. Look on the chart #4, this is 1.27 level (red horizon line) and 1.618 level (black line). Although the market has hit them both – better to use 1.27 extension. Anyway, now we will discuss how to trade the H&S pattern, and you will see that after some moment you can choose even an extended target without increasing your risk. All that you will have to do – is to move your stop loss higher.

    When we trading H&S our task (besides to make a profit, of course) is to not get in a trap of market makers. As you might have guessed already – the public mostly enters the market after classical confirmation of this pattern. And the classical approach tells, that if market returns right back (below neckline in our case) – this is not good. The public places stops in different places, even from the other side of neckline after confirmation. If just above neckline of Reverse H&S pattern, a strong Confluence resistance stands – it could lead to Reverse H&S failure. So, our task is to be calm and in a profitable position prior to breakout.
    fran alvarez likes this.
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