How to Trade the Head and Shoulders Pattern
The head and shoulders pattern is characterized by key features to look out for on trading charts. It typically occurs after a bullish uptrend when buying pressure begins to fade. The pattern includes a left shoulder, a higher middle peak, and a right shoulder approximately at the same level as the left shoulder. Additionally, the pattern should have a distinct neckline acting as a support level.
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To successfully identify and trade the head and shoulders pattern, consider the following step-by-step approach:
🔹 Look for three distinct tops, namely the left shoulder, head, and right shoulder, which occur after an uptrend.
🔹 Identify the neckline support level, which connects the lowest points of the left and right shoulders.
🔹 Wait for a breakout to occur, confirmed by a candle closing below the neckline.
🔹 Once the breakout is confirmed, place a selling order to capitalize on the bearish reversal signaled by the pattern.
🔹 Implement a stop-loss order above the neckline, ideally positioned at the highest level of the right shoulder, to manage risk effectively.
🔹 Consider using a risk-reward ratio to determine a suitable target for taking profits, ensuring the potential reward justifies the risk taken.
