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Forex Strategy – Trading The ” Common ” Head And Shoulders Pattern

In forex trading…..whenever we talk about the ” Head And Shoulders ” pattern formation..

I am sure almost 99.9% of traders would have heard about it and even traded it before.

This is also one of the forex pattern out of many that I love to trade as well…

Simply because it is very reliable and easy to trade

Here in this post, I will be sharing a technique which I take advantage of this ” Head & Shoulders ” formation to grab a nice 272 pips trading the Gbp/Usd.

With a Head and Shoulders formation in the market…..what does it means ?

This pattern is technically a ” bearish ” formation….

Sort of having ” 3 tops ” forming a strong resistance …..but with the center top being slightly higher…

Like this :

Head And Shoulders Forex Strategy

Head And Shoulders Forex Strategy

How ?

Do You ” Also” manage to see a Head & Shoulders pattern in the chart above too ?

( And the Neckline as well….? )

Some might see it without much difficulty with their naked eyes…. just like I do….

Some might get abit confused and not sure…

It’s alright…

For the sake of the absolute newbies….I shall label the details clearly with another illustration :

Head And Shoulders Forex Strategy

Head And Shoulders Forex Strategy

Now……being able to spot such ” head & Shoulders ” formation in the market doesn’t mean You would end up winning the trade

Just like any other forex trading strategy…

One still cannot escape laying down a concrete trading game plan

This game plan must essentially includes :

————————————————————————————————————-

1)  When to enter to ” SELL ”   ( in order for minimum risk )…

2)  What ” Stop Loss ” to use and what is the strategical position to place it…

3)  What ” Take Profit ” target to aim for….

—————————————————————————————————————-

Even with such common ” head and shoulders ” pattern…

But if a trader failed to consider these 3 critical elements for his/her game plan…

Then I would say the winning probability is not high in fact……

It is not about how much You would win….

It is about how much ” risk ” You have to bear when You’re wrong……!!

That explains why even with a Stop Loss in place…..it doesn’t mean Your trade is protected

When too many ” stop loss ” get hit again and again….it would accumulate to BIG LOSS in the long run too..!

Agree on this ?

If You are still not confident on laying down a game plan which can enhance Your winning % trading such head and shoulders pattern…

Then read on as I share my entire ” decision making & game plan ” on trading this pattern.

It’s simple….once You understand my detailed explanations …* smile *

For a start, let me share about :

Step #1 :  When To Enter To SELL

In order for this ” Head and Shoulder ” pattern to be a VALID one…

The price has to move and ” closed at least 1/3 ” down on the right shoulder…

Or else it cannot be considered a valid head and shoulders…

However…just like in other forex case studies of mine….I would not just enter like that…

I need a certain ” price actions  or candle stick formation ” to convince me to enter ….

For this trade…..I decide to enter once I spotted the ” inverted hammer with a bearish closed “….

( I SELL at price 1.64320 )

Forex Head And Shoulders Strategy

Forex Head And Shoulders Strategy

Step #2 :  What Take Profit ( TP ) To Aim For ?   What Stop Loss ( SL ) To Use ?

Just for Your information…..this head and shoulders pattern is spotted on the daily time frame..

So the Take Profit target can be in the range of 150 – 250 pips as daily time frame is a much bigger price projections..

In fact….I do not trade using smaller than 1 hourly….4 hourly or daily time frames for my strategy as they are filed with noise & not accurate

For this strategy….I need to calculate the Take Profit first before the Stop Loss…

That’s because  without knowing the Take Profit level to aim……

I would not know what Stop Loss to use and where to place it….( in order to achieve a good risk/reward ratio )

If You have been reading about my forex empire blog….You would know by now how much emphasis I place on a good risk/reward ratio ..

Risk/Reward ratio no good….I would not trade….simple..

For the Take Profit target….I will be using the ” neckline or the previous swing low ” as a maximum target… ( whichever is nearer )

And I would be aiming for a target at least 40 pips above the nearer one ….

Here’s my TP & SL after calculations  :

– SELL at  1.64320

– Stop Loss at  1.65750 ( 143 pips )

– Take Profit at 1.6162 ( 272 pips )

….which give us a good risk/reward ratio of   1 :  1.9 ….. ( good to go )

Forex Head And Shoulders Strategy

Forex Head And Shoulders Strategy

As a standard practice to ” reduce risk further “……

I will shift the stop loss to break-even point after the price has moved about 143 pips  ( my risk )

This is to prevent seeing a winning trade turning into a losing one.

So how did this trade turn out  ?

My Take Profit was hit after 3 trading days..

Winning a nice 272 pips for this trade.

Forex Head And Shoulders Strategy

Forex Head And Shoulders Strategy

If You notice on the illustration above too…

Shortly after my ” Take Profit ” target was hit….the price turn up again …

So it really pay to calculate a more ” conservative ” profit target always…

It does pay off in the long run !  * smile *

Though  it is a conservative target….but a 272 pips win is definitely good profits for most traders..

Plus…the risk/reward ratio for this position is a good 1 : 1.9

I would consider this a good winning game plan in fact……

Agree ?

End of the day…..it is really simple to trade such ” pattern formation ” if You know how to indentify them when they happen….

Try to spot them on at least the 1 hourly or bigger time frames…

Because they are more reliable and accurate ….

Here’s the earnings screen shot with Sell Entry, SL & TP to share :

( click to enlarge )

Earnings For Head And Shoulders Strategy

Earnings For Head And Shoulders Strategy

This trade netted me Usd $2706.11 in profits.

Did You see that my stop loss has been shifted to break even in the earnings screen shot ?

This is to ” reduce risk ” further…

Not fun to see a winning trade turning into a losing one and giving ugly deficit to our trading account – Which can be totally avoided by doing such simple move….

Agree ?

* smile *……alright so much for this forex strategy on the head and shoulders…..

Hope You learn something from this proven pattern formation today….

…..or if You have been trading such pattern previously…..BUT just can’t secure as much winning trades as You desire

Then after reading my strategy and entire decision making process…

Everything would be much clearer now for You…. I hope…..

Cheers and happy trading.

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