Forex Factory: Technical Chart Analysis - The Head and Shoulders Pattern (part 2)
At the first part of this topic, we've already shown the parts of the head and shoulders pattern and what are the things to keep in mind when using this analysis. In this post, you are to learn additional analysis that will help you understand this trading pattern more.
There may be a time wherein a pullback is deeper than expected. Best solution not to lose in this case is to use a re-test strategy in timing an entry even at a short market with better prices.
There are four steps in executing this strategy. One, see if the pullback is deep, wait for the price to re-test within the neckline or in the recent support turning resistance. Two, if the price does re-tests the neckline, wait until there's a price rejection in the market. Three, if there is price rejection, go short on the next candle. Lastly, set a stop loss above the swing high (1 ATR).
Making Profit Before it Reaches the Neckline
Fact is, you can short head and shoulders pattern even before the right shoulder of the pattern forms. With this, you might have a favorable reward on your trade. You could be in profit ahead of a broken neckline.
There are four steps in executing this. One, wait for the left shoulder and head formation in the market. Two, upon formation, let the price roll higher towards the level of the head. Three, go short upon a price rejection. Lastly, set a stop loss just above the swing high (1ATR).
Tricks in Setting The Best Entry Setup
Now, if you want to look for a higher chance in a head and shoulders trading setup, you can use a variety of timeframes. You can look for either a higher timeframe in a downtrend or a head and shoulder pattern leaning against resistance within a higher timeframe.
Exit Trades With Higher Profits
There are three ways to exit the head and shoulders with a great win.
(1)Trailing Stop Loss
One way to have a great exit is by trailing your stop loss with a 20-period moving average. Meaning, you are to exit when the market closes above 20MA.
A classic charting technique which can determine if the move is about to end. There are two steps to make it work. One, identify the length between the head and its headline. Two, copy that length and paste it from the neckline downwards.
(3)Capturing The Swing
Capturing swing works best in a re-test or ahead of the crowd technique. The idea is capturing the swing within the market. There are two steps to make it work. One, identify a swing low wherein a buying pressure is expected to step in. Two, exit trade ahead of a swing low.
That ends our discussion about the head and shoulders trading pattern. Hope you've learned a lot with this.
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