Lesson 2:Learn Forex Head and Shoulders Pattern When there is a strong upward trend, it might lead to a bearish reversal pattern - called head and shoulders. This pattern consists of a peak, known as the left shoulder, a higher peak, known as the head, and a lower peak known as the right shoulder. Look closely you’ll see a neckline which has been drawn connecting the two lows between the shoulders. In an up-trend, the first peak forms. After a small retracement, the price pushes higher creating a higher peak, but as the bull trend gets exhausted, bears try to price down again. Then, seeing this as an opportunity to buy cheaply, the bulls jump back in - but this time they fail to reach the previous high and so the bears take control, driving the price down again. As with Double Top formation, the reversal signal is only valid after the price has broken the neckline. Much of the time this is just a consolidation phase before the up-trend resumes and prices take off, creating new highs. This pattern can produce three different necklines. The first one is a neckline with a rising slope. This one has the largest probability of failing the pattern because there are no actual reversal signs since the price is still trending upwards and it’s common to see trend continuation instead of a reversal.
The second neckline is a horizontal one. Diagonal support and resistance levels are very subjective and only a horizontal neckline will appear on your chart, the same as on any other trader’s chart. The third is a downward sloping neckline. This one produces the most reliable reversal signal, as it has already fallen below the low previously. The price target for this formation should be the height from the neckline to the top, measured down from the breakout point.