Head & Shoulders Pattern: What It Means and How Does It in Forex?

The main thing for beginner traders to learn is how to predict trend reversals. But when this task is completed, you can proceed to more sophisticated forecasts and make a prognosis of how much will the price fall or increase. Forex head and shoulders pattern is respected by traders all over the world precisely because it helps to perform both of these tasks very well. What does head and shoulders pattern mean on the Forex charts? Find out how to detect this figure, and you will get a reliable indicator that is considered one of the most effective technical analysis tools.

What Is the Head and Shoulders Pattern?

Looking at the dynamics of currency price fluctuations, a trader can distinguish various patterns that repeat themselves from time to time. After observing them for a long time, analysts noticed that these chart candlestick patterns can be successfully used in trading. One such significant figure was called the head and shoulders pattern Forex. It appears in the following circumstances:

• A rapid and sharp increase in asset prices can lead to a long struggle between bullish and bearish trends.
• In this case, candlesticks on the chart form a certain pattern with three price peaks and two troughs, which visually resemble a head and two shoulders.
• After the third peak is passed, the price movement begins to rapidly creep down and the bear market wins. The fight is over until the bearish trend exhausts itself.

Head and Shoulders Pattern Attributes

To visually highlight the head & shoulders model, find all the necessary components on the price movement chart:

• Left shoulder: a gradual increase in the bullish trend, which reaches the first top but cannot gain a foothold on it and gives way to a short-lived bearish trend.
• Head: the middle peak of the head and shoulders chart pattern is the highest and, therefore, resembles a head, towering over two shoulders of approximately the same height. It is formed after a temporary bearish trend is again replaced by a bullish one that conquers a new high. After its passage, prices creep down again.
• Right shoulder: after leaving the second trough, the third and the last ascent of the bullish trend begins. This time, it cannot rise to the level of the head and gives way to a long bearish trend at about the level of the second shoulder.
• Neck: The head and shoulders trading pattern will be incomplete if the level of the neck is not considered. It is important for predicting how much the price of an asset will fall after the neckline is passed. As soon as this line is broken, it can be argued that the bears have won in this long struggle, which means that this is a signal to sell.

In order not to miss the head and shoulders pattern breakout, use the best Forex robots. Their algorithms allow tracking this and many other patterns and responding to them in time.

Inverse Head and Shoulders Trading Pattern

This trading pattern also exists in the case of a mirror situation, when there is a sharp decline in asset prices and then a long struggle between the two trends. In this case, it looks like the inverted head and shoulders Forex:

• There are three troughs in the price chart, and the middle one is the deepest. Now, this is not the maximum but the minimum price of the asset.
• There are two peaks between the head and the shoulder; in this case, they are temporary bullish trends.
• There is a final breakout of the neckline when the bullish trend wins after a long struggle. However, in the case of inverse head and shoulders, this is a signal not to sell but to buy the currency. Study Forex trading tips to know in which case it is better to open sell orders and in which to buy currency.

Head and Shoulders Trading Pattern in Forex

The versatility of this pattern allows for using it for trading any asset. The head and shoulders stocks pattern has no less value for accurately determining the time for a profitable sale or purchase of stocks. And yet, when working with head & shoulders in the Forex market, one should be aware of not only its opportunities but also its weaknesses.

Advantages of Head and Shoulders Pattern

• This indicator is one of the most reliable in terms of predicting a trend reversal. Therefore, if you see it on the chart, the probability of error is minimal.
• Head and shoulders technical analysis allows traders to fairly accurately predict the level of fall in the value of an asset after the final formation of the pattern. It is calculated by measuring the distance from the neckline to the top of the head. After breaking through the neckline, the price will fall by approximately the same amount.
• The bullish head and shoulder pattern has three troughs and shows that, at this time, a trader should not rush to buy currency, since the trend struggle is not over. Similarly to that, upon reaching the peak values on the direct head and shoulders pattern Forex, one should expect an early decrease and then again an increase in the asset price.

Disadvantages of Head & Shoulders Pattern

• There is a possibility of receiving a false signal to sell the currency because, as soon as price movement reaches the neckline, the long-term upward trend can return again. However, in 85% of cases, the model will give an unambiguously accurate signal.
• Since the pattern is formed over a long period, a trader can miss an opportunity to open an order. This happens when a trader expects to see a currency or stock chart head and shoulders pattern, but in the end, it does not form.

The Bottom Line

What does a Forex head and shoulders pattern mean in local and global contexts? From a practical point of view, it shows when a bearish trend finally wins after a long struggle. And this means that the opening of sell orders at this moment will not bring unpleasant surprises. In the case of the upsidedown head and shoulders, you will be able to see after breaking through which line the bullish trend wins. After that, you can safely buy a currency in anticipation of an increase in its value.

If you look from a more fundamental point of view, then the head and shoulders pattern Forex demonstrates the laws of the trends’ struggle. How does head and shoulders work?

• The first peak or the first shoulder gives up to a downtrend after the inability to gain a foothold at this level.
• However, the unrealized potential for growth pushes it up again and allows reaching a maximum peak, followed by a decrease.
• The third attempt to climb the price is the last one, and, having exhausted without reaching the previous height, it gives way to the opposite trend.

Knowing the logic of the struggle of trends and being able to see them on the chart in a direct position or as an inverse head and shoulders target, you can correctly calculate Forex strategies and achieve significant success in trading.