Head and Shoulders is great, not just as a shampoo option, but also as a chart pattern to pay attention to. If you notice a head and shoulders formation coming into being on your charts, you should take the time necessary to make sure you know what this means and how you should react to it.
A Reversal of Fortunes
The head and shoulders pattern is famous for being one that signals a reversal in what has been happening with a given currency pair. This pattern is most often seen in uptrends, and it is often all about signaling that there is something changing in what has been going on with that pair.
What the Formation Looks Like
There are two types of Head and Shoulders formations — the standard (with three peaks and a potential downtrend signal) and the inverse (with three lows and a potential uptrend signal).
Standard Head and Shoulders
You will see a head and shoulders pattern form when there is a peak in the pair that you are reviewing followed by a higher peak after that, and then a lower third peak. The first peak is the first shoulder, the second peak is the head, and the third peak is the other shoulder in this case. Thus, you will recognize this formation as it takes hold whenever you see it appears on your charts.
When you do see the head and shoulders formation taking place, you should make sure you take it as a sign that the uptrend that you have been witnessing may be about to end. You do not want to take any chances when it comes to holding on to a trade that is headed south on you rather quickly, and the head and shoulders formation is a great indication of something major changing in the pricing of the pair that you have been looking at.
Often, traders expect the price to move downward from the neckline in proportion to the distance between the head and neckline. In other words, a take profit target could be calculated by measuring the distance between the head and neckline and applying that distance to your neckline downward.
Inverse Head and Shoulders
As you might imagine, an inverse head and shoulders formation is simply an upside-down formation of a standard head and shoulders. These occur after extended periods of downward movement in price action
Take the time that you need to in order to figure out what you are looking at with a head and shoulders formation, and then get into an active mode to make sure you don’t leave anything on the table.
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