Head and Shoulder Patterns in a Nutshell

There are various trend reversal patterns that are used in forex technical analysis. This article focuses on the head and shoulder pattern. The head and shoulders pattern serves as one of the most reliable trend reversal patterns used in Forex technical analysis. The forex head and shoulder pattern can be observed on forex charts and aids in price movement predictions. In forex trading, head and shoulders reversal pattern formation allows you to clearly pinpoint the signal and entry point of price movements.

The Head and shoulder pattern consists of three peaks of price movement, resembling the outlines of a head and shoulders. The three peaks of price movement are characterized by the following movements:

1. The currency price rises to a first peak and then declines, forming the first shoulder.

2. The same currency price rises again, this time to a higher level that the previous peak point, and then decreases. (Forming the head).

3. The currency price rises for a third time, but do not move above the second (the head) peak, then decreases. (Forming the second shoulder.)

The shoulders of the FX trading head and shoulder pattern are made of the first and the third peaks. They are about of the equal height, but lower than the second “head” peak. The head is represented by the second peak and always the highest of all the peaks. The neckline is the base line that supports the three peaks. The foreign exchange head and shoulder pattern is completed and recorded as part of Forex technical analysis, once the price movement falls below the neckline after the second shoulder. Prices will fall below the neckline when there is heavy market volume. When breakouts occur during a low market volume, the breakout is ignored and considered as false.

How do traders use the information provided by the head and shoulders reversal pattern? Using the information supplied by the forming chart, traders will make an entry under the neckline of the head and shoulder formation. By analyzing the distances between the neckline and the head, traders can predict how far price movements will go.

Reverse Foreign Exchange Head and Shoulders Pattern

The Reverse FX trading head and shoulder pattern is an upside down version of the standard head and shoulder pattern.

The three peaks of price movement are characterized by the following movements:

Left Shoulder - a falling in price to a low point, followed by a rise in price.

Head - currency price decreases down way below the left shoulder and then rises again.

Right Shoulder – A currency price fall for a third time, and then rises again.

The neckline – The base line which connects the highest points, on the chart.