What is a Head & Shoulders Pattern?

No it’s not shampoo… hardy har har!

A head and shoulders pattern is a trading pattern that looks just like it sounds… a head and shoulders. Here is a picture.

• Do you see the ‘head’?
• Do you see how the 2 shoulders are lower than the head?

Here is the way it went down… During the first up move, buyers could only push price so high, before sellers came in and pushed it back down but OOOOHHH NOOOO buyers were not done yet!

Buyers got real good and irritated and bought more to push that bad boy right back up and take out stops. Then the sellers got their panties all in a wad and started selling again (HEAD) and on the third move, the 2nd shoulder, buyers tried for the 3rd time and lost. At this point, the buyers gave up.

Price just dropped from there.

This pattern shows a struggle over price and is a short term move called a measured move. With this pattern, we can actually measure how many pips we can earn, almost to the pip sometimes. This is the magic of the head and shoulders.

Check this out…

Strategy Time!

If you enter on the break of the support trend line, which will be the lowest point of the head before the 2nd shoulder, then you can just about bet your money that the move down will equal the amount of pips from the trend line all the way to the top of the head (give or take a few pips).

 

Read that again until you understand it. This is what I like to call a light bulb or WOW moment, if you never knew this. The head and shoulders pattern can also be reversed for buying opportunities as well.

Now go look for head and shoulders patterns and see what you think.

Happy Trading!