The perfect guide to trading the head and shoulder pattern
Forex market might be the biggest market in the world, still, you should join this profession after having a deep though. Those who have started to trade the market to become rich have lost their savings. In fact, there is no shortcut way to make a profit. To get yourself on the right track, you must educate yourself from scratch. Many people in Australia have changed their life just by developing the skills of trading. In this article, we are going to teach you how to trade the head and shoulder pattern like the pro traders. After reading this article, you will have the confidence to trade any bearish reversal based on the head and shoulder pattern.
Formation of the pattern
The formation of the pattern is fairly easy. First of all the price will start rallying higher and eventually fall to a critical support level. After that, the bulls will again push the price high and break above the last high. But the rally will not last long and this time the fall will be much bigger. Eventually, the bulls will again gain strength and push the price high and fail to break above the last high. The first high is your left shoulder, the second high is the head and the third high is the right shoulder. The critical support which refueled the bulls is known as your neckline. By now it should be pretty clear about the formation of the pattern.
Selection of the time frame
The selection of the time frame is the most important thing when you trade the head and shoulder pattern. In the CFD trading industry, trading the lower time period is considered an aggressive strategy. So, try to look for the head and shoulder pattern in the daily and weekly chart. However, the 4 hour period can be used when you look for the potential pattern in the cross pairs. Since the price movement in the cross pair is extremely high, you can easily make a huge profit by trading the 4-hour time frame.
Break of the neckline
You know the perfect way to spot the head and shoulder pattern. So, when is the perfect time to place the short order? To place your short you must have daily closing of the price below the critical support level. Most of the time, the traders are able to make decent profits by following this strategy. Those who use the aggressive trading strategy often ignore the concept of “daily closing” to place the short orders. It helps them to make more profit but still, the risk is very high. If the bears fail to clear the neckline you are going to lose money and the bullish trend will remain intact.
Analyze the news factors
The breakout of a critical support level is nothing but the end result of high impact news. So, in order to trade the head and shoulder pattern, you have to learn news analysis. Learning analyzes the high impact news is not all tough. Focus on the news data and technical parameters and you will know where to place the orders. But make sure you are not making things overly complex by adding too many variables to this trading strategy. A simple trading strategy always works best and helps the traders to make a consistent profit. So, think twice before you place any orders in the market.
Trading the head and shoulder pattern should be very easy for you. But don’t you think you need to practice the strategy in the demo account. Jumping into the real market with this strategy is a very big mistake. Open a demo account and see how well you execute the orders based on this strategy. And try to create a risk management plan so that you don’t have to lose big money when the trade goes wrong.