In this article, we are going to discuss the super famous, and very popular “head and shoulders” pattern. First, what it is, and secondly is how you can capitalize on this. As with many indicators, they tend to be self-fulfilling since so many traders are looking at the same patterns! This is the reason why I think all traders should learn the most popular and used techniques.
The head and shoulder techniques deals exlusively with the support and resistance, and more specifically, testing these prices. The head and shoulders is a price reversal pattern, so be weary if you are bullish about a forex pair and you see this pair forming. On the contrary, there is a reverse head and shoulders pattern, that shows price increasing.
Please check out this chart,
As you can see, the head and shoulders test the support price point. The “shoulders” and the “head” are price increases. The pricing then retracts, hitting the support price. Once the final shoulder tests the support, it tends to break that price, thus decreasing more.
One thing to keep in mind is the slope of the neckline. A solid reading for a head and shoulders patterns is that the neckline has to be flat. As you can see on the chart above, the neckline is completely flat, thus indicating a strong head and shoulders probability.
Now, there is also an inverted head and shoulders pattern. This pattern looks like the head and shoulders, but inverted(duh!). So, the neckline is the resistance. The pricing dips down(thus making the head and shoulders) and hits the resistance(making the neckline). Usually on the last shoulder testing the resistance, it will break through that price.