9. How to Trade the Head and Shoulders Pattern Part 1

Remember that practice makes perfect! :) So be sure to register for a free practice trading account here: http://bit.ly/forex-demo1 The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use this in the stock market, forex market, and futures market. For the full article with links, images, and discussion, click here: www.informedtrades.com/3047-head-shoulders-pattern.html VIDEO TRANSCRIPTION: As we have learned in previous lessons, double tops and double bottoms are forex, futures and stock chart patterns which show that the momentum needed to break a specific level of resistance for the double top and support for the double bottom is not there. When these patterns show up on a stock, futures or forex chart day traders will look for a reversal of the current trend. In this lesson we are going to look at a chart pattern which also shows that the momentum needed to break a support or resistance level is slowing which is known as the head and shoulders pattern and the reverse head and shoulders pattern. Once we have a sound understanding of how to spot these patterns we will then look at a specific strategy for trading these patterns when they appear on a chart. A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern. The head and shoulders pattern is thus seen as a potential reversal pattern and day traders will pay special attention to this pattern when it occurs on an uptrend, and will look to trade a potential reversal of the uptrend should the pattern play out. For further confirmation that the potential for a reversal is high traders often give more credibility to a falling neckline than they do a rising neckline. The reverse head and shoulders is basically a mirror image of the head and shoulders pattern and is defined by one trough, followed by a second lower trough, which is then followed by a third higher trough, and then finally a break above the resistance level established by the two peaks formed by the pattern. the reverse head and shoulders is basically showing the sellers trying 3 times unsuccessfully to take the market lower before finally giving into the buyers who theoretically retain control after the 3rd failure. Like the Head and Shoulders Pattern, the Reverse Head and Shoulders is seen as a reversal pattern, and traders of the stock, futures and forex markets will pay special attention to this pattern when it occurs as part of a downtrend should the pattern play out. For further confirmation that the potential for a reversal is high, day traders will look for a rising neckline.

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7. Hey Dave, thanks for this video - keep up the excellent job! 1 quick question: what's the profit target for the H&S or reverse H&S patterns? cheers,
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9. Interesting video. What is the estimated time frame that you should be reading the chart at? 3 months? 1 year? Or what?
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13. Very good explanation of head and shoulders. Nice examples.
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19. We are in a LONG time frame head and shoulders in the DJIA right now, this could be a down market breaking below 10k if technicals are correct
20. My question is in regards to the reverse H+S pattern shown in your example graph. There looks to be a 2nd shoulder in between the Head and what you labeled as the 2nd shoulder. As I would be seeing what I could consider to be a 2nd shoulder before the one that you labeled ever came into existence, how can I differentiate between what I would likely recognize as the 2nd shoulder (as it is happening) versus what you eventually labeled as the 2nd shoulder?