Forex Chart Formation Patterns_2. Learn Forex Head and Shoulders Pattern

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.