What does head and shoulder pattern means and how to do trading with it?
A head and shoulder pattern is a bearish chart pattern. In technical analysis, the pattern predicts the reversal of the bullish trend to bearish trend. You can identify the pattern with three peaks, where the first and third peaks are close in height and the second peak (Middle peak) is the highest. Although it’s present in all time frames, but it’s effective in the upward trend.
It is one of the most accurate patterns that indicates an upward trend is nearing to its end. It is one of the most reliable trend reversal patterns
How to Identify the pattern?
Identify the pattern with the following.
a) Most importantly pattern is Effective when formed in uptrend
b) Look for the formation of three peaks with first and last to be similar in height and the middle peak to be the highest
c) Price action should break the neckline (Support Level)
What will be the head and shoulder pattern entry point?
Breakout point
You can invest your money at the Closing of the candle which breaks the Neckline (support level)
Head and shoulder pattern where to put stoploss?
You can put your stoploss near the opening of the breakout candle.
Where to put a target using head and shoulder pattern?
The price gap which forms between the first Peak and the neckline, will be your target from neckline downwards.
Re-Test Point
In head and shoulder pattern you will observe that few of the times price takes a reverse turn after breaking the neckline. so, this will make you run for your money, but this is also a good opportunity to enter into a sell position. The price com es back to the neckline to do a re-test and bounce back from the Neckline (which is now the resistance for the price). You can enter into a sell position at the close of the re-testing candle.
Stoploss and target placement after price Re-testing.
The stoploss will be the same as breakout point, which is the opening of the breakout candle. And You can put your target with price gap between the neckline and the first peak (depends on you how much risk you can take, You can always 2x the target)