Continuation and Reversal Head and Shoulder Patterns
Thirtieth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session Continuation and Reversal Head and Shoulder patterns will be discussed in detail.
Before further explanation about these patterns, traders must figure out some mandatory issues.
Neckline Downtrend
Neck line can be drawn by trader through connecting the valley of the left shoulder to the valley of the right shoulder.
Left valley is between the left shoulder and Head, while right valley is between Head and right shoulder.
Due to the fact that Head and shoulder is a Reversal pattern, this format will be formed on the upward trend consequently the foreseen trend would be downwards as market price crosses the neckline.
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Neckline Uptrend
Again Neckline can be drawn by trader through connecting the peak of left shoulder to the peak of right shoulder.
Left peak is between left shoulder and Head, while right peak is between Head and right shoulder.
Since this format of Head and shoulders would be formed on a downtrend, the predicted direction of the price will be upward after it passes the neckline.
H height
A vertical line between the Head summit and Neckline in Downtrend, or Head bottom and Neckline.
Entry price
Order entry price is the point where Neckline crosses the market price.
Take profit
Take profit equals H or half of H value.
Stop loss
In decreasing mode, Stop Loss is above the right shoulder peak point, while in increasing mode Stop Loss price can be placed under the right shoulder valley.
Last kiss
Last kiss, is a favourable point where traders can place an order, it happens when price returns to the Neckline after it crossed it earlier.
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Graphs illustrate the specification of different Head and shoulders patterns. There are 3 various reverse types with little discrepancy.
In an increasing trend, on first graph, price moves upward in an uptrend until it reaches left shoulder peak, then a small decline followed by an uptrend to Head summit, another descent followed by an ascent, and eventually the downward movement passes neckline with further decline.
The middle graph displays another uptrend example.
Left shoulder, Head and right shoulder are formed and Neckline can be drawn in an uptrend by connecting left shoulder valley to right shoulder valley.
H is a vertical line from the summit of Head to Neckline. Neckline is sometimes horizontal while it frequently has a slope.
The right top graph shows that Neckline is a gradient line in which traders do not place any order due to inappropriate or late entry price.
In decreasing mode, Neckline connects the left shoulder peak to the right shoulder peak. H is the vertical line between Head bottom and Neckline.
The downward Neckline is displayed on left graph, while upward neckline is shown on the right graph with a late breakout point which is not suitable for placing an order.
Entry point is the breakout price where price crosses the neckline, thus in an uptrend a trader can place a Sell order on a breakout point, on the top 3 graphs.
The 3 bottom graphs show downtrend market, in which traders can place a Buy order on a breakout point.
Stop Loss on Sell orders can be over the right shoulder peak while on Buy orders it can be lower than the right shoulder valley.
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There are 3 different types of relation between H and right shoulder. The Left graph shows a pattern that right shoulder height is lower than H/2.
This type of Head and shoulders represents best opportunity to place a Sell order.
The middle graph illustrates H/2 equals the height of the right shoulder, thus TP and SL have the same amount but in the opposite direction.
Right graph shows that right shoulder height is higher than H/2. In this type SL value is more than TP, thus this type is not recommended for placing an order.
Most of the time TP is set on the H/2 value away from the breakout point.
The Left-bottom graph indicates the best condition for a trader to place a Sell order, in which Neckline has an upward trend.
The Right-bottom graph illustrates the worst condition for a trader to place a Sell order, in which Neckline has a downward trend.
Bullish and Bearish Head and shoulders patterns have the same conditions and manner considering the relationship between right shoulder height and H/2.
Continuation Head and Shoulder
The Continuation Head and shoulder is shown on the following graphs. The left graph illustrates an uptrend, followed by a small decline.
Left shoulder, Head and right shoulder are formed with an upward direction that crosses the Neckline.
As it is clear the uptrend is followed after head and shoulders is formed, thus this pattern is classified as continuation.
On the right graph, continuation head and shoulders on downtrend is formed.
Head and shoulders is a unique pattern that provides both continuation and reversal format.
Trader can check MT4 for several examples. For instance, there is a reversal head and shoulders.
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Trader can draw its figure with Trendline option in the toolbar.
Left shoulder is followed with Head and Right shoulder, so neckline can be drawn easily.
Trend movement can be predicted by using a Fibonacci pattern on H line.
Fibonacci shows that trend passed the H/2 amount followed by a decline, however, it crossed the H amount from the breakout point.
Trader should practice considerably to develop his/her trading ability.
It is better to draw asymmetrical head and shoulders patterns which are hard to identify.
There is another example, with a long left shoulder followed by a Head and small right shoulder, in which neckline is an upward line.
Both left and right valleys are connected, and a Fibonacci pattern is drawn with vertical format on H, then it can be relocated on breakout point to recognize the H/2 and H points.
Trend has followed the downward direction and passed the H/2 price.
In this example, a trader can draw other different head and shoulders pattern, however, its breakout point was formed too late.
A continuation Head and shoulders pattern can be drawn easily on a downtrend.
Neckline can be drawn by connecting left and right valleys, which have an upward direction.
A Fibonacci pattern can help a trader to find the H/2 and H prices easily, as in the previous example. Both H and H/2 prices have been met by market price.
Another example can be found on D1 timeframe. On an upward trend, a continuation Head and shoulders can be drawn.
A Fibonacci example is placed on H line. Trader can relocate the Fibonacci line to decrease the bustle on the chart.
H/2 and H prices have been reached later by market trend.
There are numerous examples on different timeframes of a symbol.
Trader can find a Head and shoulders pattern on H4 timeframe, so a region can be marked for further study.
Left shoulder, Head and right shoulder can be identified easily.
There would be different length of shoulders in a pattern, thus Head and shoulders can be an asymmetric pattern.
Another reversal head and shoulders on a downtrend. The previous pattern is an upward line, while the recent example has downward neckline.
That concludes this session, until next time and another session take care.