Head and Shoulders Price Pattern Strategy: 6 Steps to Profit

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

The head and shoulders price pattern strategy is a pivotal tool for traders aiming to maximize gains in the fluctuating market. This article unveils a six-step guide to effectively leverage this strategy, enhancing your trading decisions.

Itโ€™s designed for both novice and seasoned traders and offers deep insights into recognizing and capitalizing on market trend reversals.

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In the following sections, we detail each step of this strategy, from identifying the pattern to executing trades. This guide simplifies complete market dynamics, equipping you with the knowledge to spot and respond to key trading opportunities.

Learn the Head and Shoulders Pattern

These rules will show you how to identify head and shoulder patterns and bullish or bearish trends. They will also show youย inverse head and shoulder targets,ย pattern failure, and so much more.

We are excited to give you a new strategy this week on the head and shoulders pattern rules. Do you want to know how to trade the pattern? Are you looking for an effective head and shoulders price pattern strategy? Then you came to the right place!

Check out this article for a step-by-step guide on a chart pattern strategy!

The patterns are literally everywhere on your charts. So, swing traders, day traders, and scalpers should love this strategy. There are plenty of trading opportunities with this method, which would make it a nice addition to your trading system if you want to trade these patterns.

Moreover, there are many head and shoulders Forex traders who absolutely love this strategy and use it day in and day out with a great deal of success.

What exactly am I talking about in terms of the head and shoulder patterns?

Price patterns resemble exactly what they are called head and shoulders (double top pattern).

Head And Shoulders Price Pattern Strategy

As you can see above, I created a nice little graphic to show you what I am talking about.

These patterns are formed from either an uptrend or a downtrend. They are very easy to spot on your charts. In the picture above, the price declines from the market high, which you can interpret as the โ€œhead.โ€

Then, the sellers took over and drove it back down. The buyers made one last effort, but again, the sellers drove the price down, which broke the neckline and formed a downtrend.

This โ€œnecklineโ€ is where we want to make our entry and grab some pips on the downtrend that formed.

Also, this same concept can be applied to an inverse head and shoulders, which I will explain to you later on.ย Also, read about the Forex Mentors and the best investment you can make.

Indicators for Implementing the Head and Shoulders Price Pattern Strategy

There are no indicators that you will need to put on your charts. However, you should plan on putting lines on your charts to indicate the head and shoulder pattern and neckline.

You may wonder where the head and shoulders pattern indicators MT4, ninja trader, FXCM, and many more are. Well, the only head and shoulders indicator that can be used in this strategy is your own eyes.

Think of it as a free trading indicator to trade head and shoulders! Once you identify about 100 of these patterns on your charts, they will become like second nature to spot.

Sell Entry Criteria: Head and Shoulders Pattern Trading Strategy

Here are the six rules that you need to follow to learn how to use the head and shoulders price pattern strategy. This isnโ€™t a get-rich-quick scheme, so take your time learning this process because hard work pays off!

Rule #1 โ€“ (Head and Shoulders Pattern Rules): Find an Uptrend on Your Chart

Head And Shoulders Pattern Rules

Once you have established that there is an uptrend, look for retracement and then another bullish push price action.

Rule #2 โ€“ Look for Retracement, Then a Bullish Push to a New High

Head And Shoulders Forex Pattern

The new high will be the โ€œhead.โ€ What you will now need to see is the price move back down to form another shoulder before making another run to the upside.

Rule #3 โ€“ Wait for Another Retracement, Then Another Move to the Upside.

Mt4 Triangle Pattern - Head And Shoulders Indicator
Irycmwe8

No two โ€œhead and shoulderโ€ formations will look the same. Sometimes there will be a little noise which may make it difficult for you to see. Take your time analyzing the shoulder chart pattern, and you should be able to accurately spot these formations.

In this scenario, as the price nears the neckline following the โ€˜headโ€™ formation, numerous investors who participated in the last buying wave begin to notice a significant increase in sellers compared to buyers. This realization prompts them to exit their positions to mitigate potential losses.

Rule #4 โ€“ย Head and Shoulders Formed: Price Action Should Now Move Downward to the Necklineย 

Rule #4 Triangle Pattern - Head And Shoulders Indicator

So now, since the buyers are all getting out of this to minimize their losses, the sellers take over the trend and drive it down.

Inverse Head And Shoulders Continuation Pattern

The neckline is simply the place where the price will touch and then head back to the upside in this example. We can confirm that it was the proper neckline because it touched this at three different places. I marked these areas with green arrows so you can confirm what I am saying.

Rule #5 โ€“ Head and Shoulders Pattern Wait for Price to Break Neck Line

Now, the moment of truth is when the price action gets to the neckline. This is a crucial moment for the sellers to get on board. As you can see, the neckline was broken here, so now you are set up to make a trade.

Note: This will not always break immediately. Sometimes, you will have a small bounce and consolidation before the neckline breaks; this is something you need to be aware of.

Another observation you must make is that not all setups will materialize into a trade. Many times, a head and shoulders pattern failure will occur, and in that case, the neckline does not break, and you should not enter the trade.

That is why you must always wait for the setup to take place before entering the trade.

Neckline Price Broke Out Head And Shoulders Indicator

Rule #6 โ€“ Entry Criteria: Wait for a Small Retracement (Head and Shoulders Target Price)

Before you enter, wait for a small retracement. In this example, I bumped down to a 15-minute time chart to make my entry. This is a great idea if you have identified the head and shoulders target on a 1 hour time chart.

Head And Shoulders Retracement Candle Pattern

Rule #7 โ€“ Stop Loss/ Take Profit

This rule goes hand in hand with rule #6. Make sure you determine a stop-loss placement before you enter a trade. There are many different exit strategies that you can use with the head and shoulders strategy.

Stop Loss Placement

If you are new to this strategy, I recommend going for a stop loss above the shoulder. If you have been successful with this for a long time, you can try having it right above the neckline.

This will give you more profit because you will have a tighter stop loss, but it will also create more losses as well because of whipsaw action. Test this out and determine how well it works for you.

See the image below for stop placement:

Stop Loss Above Shoulder And Entry Point On Break Of Neckline
Stop loss above shoulder

Advanced method: Once you have been consistently profitable for a considerable period of time and you are confident in this strategy, I recommend trying the stop loss right above the neckline.

This is a much tighter stop loss and will result in greater profits if mastered, but it is a more difficult entry due to the smaller stop size.

See the image below for stop loss below the neckline:

Stop Loss Head And Shoulders Strategy Pattern Indicator

Target Placement

The best way to place a target is to identify the closest support level and place your target just above that level. This is because the price most often runs to the nearest support level after a key neckline break.

Moreover, this simple method of finding the head and shoulders target price will dramatically increase your win rate and should help you become a successful trader. The most important part is to follow the rules and evaluate your trades on a regular basis.

See the take profit placement image below:

Head And Shoulder Forex Strategy Target Placement
Head and shoulder target placement

Advanced method: I recommend you go for a 1:3 risk-to-reward ratio (similar to what our trend-breaker strategy uses)

Determine your stop loss and calculate a 1:3 risk-reward ratio.

That was the criteria for a sell trade, so here are the rules to trade an inverse head and shoulders pattern.

For example, if the stop loss was 100 pips, then place a 300-pip target.

Important tip:ย Keep note of the support levels because the price will often bounce, and you can lose all the profit you gained on the trade. It might be a good idea to practice locking in profit when the price gets near a key support level.

Buy Entry Criteria (Inverse Head and Shoulders Target)

  1. Find a downtrend on your chart in any timeframe.
  2. Head and shoulder indicator โ€“ look for a retracement, then a bearish push to a new low.
  3. Wait for another retracement, then another move to the downside.
  4. Price action should now move upward to the neckline.
  5. Wait for the price to break the neckline.
  6. Entry criteria- wait for a small retracement, then enter the trade.
  7. Determine stop loss and use a 1:3 risk-reward ratio.

Below, you can see an example of a buy entry GBP/USD currency pair taken on a 5- 5-minute chart:

How To Trade Using The Head And Shoulders Forex Strategy
+72 Pips Head And Shoulders Indicator

Wrapping Up

The head and shoulders price pattern strategyย is great for any time frame. I showed you examples of a trade that used a one-hour chart and a five-minute chart. Make sure never to trade this strategy until you see the break of the neckline.

I could show you countless examples of the price hitting his line but not breaking it. This method is not perfect, but if used correctly, it should be a great addition to your trading system.

The 1:3 risk-to-reward ratio is nice because even if you have a few losses, the winners far outweigh the losers. Also, theย head and shoulders indicator is yourself with this price action strategy. You decide when to trade, not an indicator.

Too many traders want indicators to do all the work. Sometimes, they want to be away and have a robot trade from them. If that is you, then this strategy will not work for you because you need to put the work in to reap the benefits.

Thanks for reading. As always, if you have any questions about the head and shoulders price pattern strategy, feel free to ask in the comments below.

P.S. If you prefer trading with the trends, go ahead and check out the trend-following strategyย that we developed a while back.

Head and Shoulders Price Pattern Strategy Video

Like this strategy? Grab the free PDF strategy report that includes other helpful information such as more details, chart images, and many other examples of this strategy in action!

Head and Shoulders Pattern PDF Download

Want the PDF version, head and shoulders pattern pdf trading strategy? Tap here to download now:

E Book Head And Shoulders Price Pattern Streategy
E book head and shoulders

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15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

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  1. I am not profitable yet. But i have not blown my account either. The more you do something the better you get. It is all about finding the strategies that work for you. This is a good strategy. Thank you for your time to give me this information.

  2. Great post however I was wanting to know if you could write a litte more on this subject? Iโ€™d be very grateful if you could elaborate a little bit further. Many thanks!

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