The Forex Head and Shoulders Pattern is one of the most reliable patterns in Forex Trading. A reversal pattern forms when the price reaches a high point and then falls, forming two shoulders and a head. Once the pattern is confirmed, it signals that the price will soon reverse direction.
What is Forex Trading?
Forex Trading is the process of speculating on the movement of currency pairs. For example, if you think that the EUR/USD pair will rise in value, you would buy the pair and hope that it does indeed rise. If your prediction is correct, you will make a profit. You can use technical analysis to know when to buy or sell, and the head and shoulders pattern is an example.
What is the Forex Head and Shoulders Pattern?
The Forex Head and Shoulders Pattern is a reversal pattern that forms when the price reaches a high point and then falls, forming two shoulders and a head since it failed to form a higher high. The ‘head’ is the highest price point while the shoulders are the lower lows on both sides. In a bearish scenario, the ‘head’ will be the lowest price point while the shoulders will be higher lows on both sides.
How to identify the Forex Head and Shoulders Pattern?
The head and shoulders pattern is easy to spot on a chart. First, you need to find an asset that is in an uptrend or downtrend. For a bullish market, the price will reach a high point and then form a shoulder. The second shoulder will form at a lower high, and the head will be the lowest point between the two shoulders. To confirm that a head and shoulders pattern is forming, you need to wait for the price to break below the neckline. The neckline is formed by connecting the lows of the two shoulders. Once the price breaks below this line, it signals that the trend has reversed and that the price is likely to reverse. The reverse applies to a reversal of a bearish trend as shown below;
Step 1: Look for a market with a clear uptrend or downtrend.
Step 2: Look for a point where the price reaches a high and then falls, forming the left shoulder.
Step 3: Look for a point where the price reaches an even higher high and then falls again, forming the head.
Step 4: Look for a point where the price reaches a low and then rises, forming the right shoulder.
Once you have found all four points, you can confirm that the Forex Head and Shoulders Pattern is in place.
Other Forex Trading Patterns
There are many other Forex Trading Patterns out there. Some of the other popular ones include;
1. The Flag Pattern
The flag pattern is a continuation pattern that forms when the price consolidates after a sharp move. It usually takes the shape of a rectangle and can be found in both uptrends and downtrends.
2. The Triangle Pattern
The triangle pattern is another continuation pattern that can take different shapes. The most common ones are the ascending triangle, which forms in an uptrend, and the descending triangle, which forms in a downtrend.
3. The Wedge Pattern
The wedge pattern is similar to the triangle pattern but is slightly more aggressive. It can also take different shapes but is most commonly found in uptrends as a bearish reversal pattern and in downtrends as a bullish reversal pattern.
4. The Triple Top Pattern
This is similar to the Head and Shoulders pattern but with three highs instead of two. The triple tops do not need to have a ‘head’, or peak like the head and shoulders pattern does.
5. The Triple Bottom Pattern
This is the opposite of the Triple Top Pattern and signals a potential reversal from a downtrend to an uptrend.
3 Reasons why you should use the Forex Head and Shoulders Pattern
1. It is one of the most reliable patterns in Forex Trading.
This pattern has a very high success rate and is one of the most reliable reversal patterns in Forex Trading.
2. It can be found in both uptrends and downtrends.
This pattern is not limited to just one direction and can be found in both uptrends and downtrends.
3. It is easy to identify.
This pattern is relatively easy to identify, which makes it ideal for beginner traders.
Tips for using the Forex Head and Shoulders Pattern
1. Look for a clear trend.
The first step is to look for a market with a clear trend. This will make it easier to identify the pattern.
2. Look for confirmation.
Once you have found the pattern, wait for confirmation before entering a trade. This can come in the form of a break of the neckline or a move below the lows of the right shoulder.
3. Set your stop loss.
Once you have entered a trade, be sure to set your stop loss at a level that gives you enough room to breathe. The last thing you want is to get stopped out prematurely.
4. Take profits gradually.
When taking profits, it is best to do so gradually. This will allow you to stay in the trade longer and potentially make even more profit.
5. Be patient.
Lastly, be patient. The head and shoulders pattern is a very reliable reversal pattern, but it can take some time to play out.
Use the head and shoulders pattern while trading with DecodeFX
Before using the head and shoulders pattern, make sure you signup on a reputable and regulated forex trading platform such as DecodeFx. This gives you the best trading conditions to execute and manage your trades seamlessly. Sign up and get started today!