What is Head and Shoulders Forex Pattern
Do not confuse with the term head and should with your head and shoulder. It is a technical term used in Forex Trading. This term represents a chart pattern that is used to predict the trend continuations or the trend reversals. This chart pattern is named head and shoulder because this represents the head as the highest and the shoulder as the lowest. This Head and Shoulders Forex Pattern is not easy to master but with practice traders and investors can learn to use this chart pattern. This chart pattern is mostly found in the middle of a trend or at the end of a trend. In this chart pattern, three rallies are shown in which the center rally is the highest and so it called head and the two side rallies are the lowest and called the shoulder. A trend line can be drawn by connecting the low points of both the shoulders.
There are two types of Head and Shoulder chart patterns. The first chart pattern gives us the signal of trend reversing towards the upside in the chart and in this pattern head is located between both the shoulders with the highest price. The second chart pattern gives us the signal of trend reversing towards the downside in the chart and in this pattern head is located between both the shoulders with the lowest price. In case of an uptrend this chart pattern can show a bearish trend reversal and in case of a downtrend this chart pattern can show a bullish trend reversal. The line sketch of Head and Shoulders Pattern is shown in the figure below.
The Head and Shoulder chart pattern is popular for false breakouts. The top price of Head and Shoulders pattern should occur at higher level than an appropriate moving average (MA), which could be the 50 days MA and for the longer pattern it should 200 days MA. MA should move in the direction of the Head and Shoulders chart pattern and if it does not happen then it means that the top of the Head and Shoulders chart pattern is less reliable. The facts that the traders and investors should understand is that the longer time it takes for the chart pattern to shape, the longer time will be required by the price of the currency to touch its target level. An example of a Head Shoulder Chart Pattern is shown in the figure below.
As you can see in the figure above, there are left shoulder and a right shoulder and in between the shoulders a head is drawn. Below is the neckline and the point where the neckline is clearly broken is the Price Breakout of this pattern.
Many Head and Shoulders Forex pattern take shape in every currency trading session but trade decisions cannot be taken on every shape. The important question here is whether the Head and Shoulders Forex pattern is strong, legitimate and reliable enough to trade or not.