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Reversal Chart Patterns: Head and Shoulders & Reverse Head Shoulders

Head and shoulders Chart Pattern

This is a reversal chart pattern that forms after an extended Forex uptrend. It is made up of three consecutive peaks, the left shoulder, the head and the right shoulder with two moderate troughs between the shoulders.

 

This pattern is considered complete once price penetrates below the neckline, which is plotted by joining the two troughs between the shoulders.

 

To go short, Forex traders place their sell stop orders just below the neckline.

 

Summary:

  • This Forex pattern forms after an extended move upwards
  • This formation indicates that there will be a reversal in the market
  • This formation resembles head with shoulders thus its name.
  • To plot the neckline we use chart point 1 and point 2 as shown below. We also extend this line in both directions.
  • We sell when price breaks below the neckline; see the chart below for explanation.

Reversal Chart Patterns

 

Or the head and shoulders can also form on a slanting neckline, like the example below:

Slanting Head and Shoulder Chart Pattern

 

 

Example of Head and Shoulders Pattern on a Currency Chart

Example of Head and Shoulders Pattern on a Currency Chart

Head and Shoulders Pattern

 

This chart pattern can also be formed on a slanting neckline, like the one above, the neckline does not have to be necessarily horizontal.

 

 

Reverse Head and shoulders Chart Pattern

This is a reversal head and shoulders pattern that forms after an extended Forex downtrend. It resembles an upside-down head shoulders.

 

This pattern is considered complete once price penetrates above the neckline, which is plotted by joining the two peaks between the reverse shoulders.

 

To go long buyers place their buy stop orders just above the neckline.

 

Summary:

  • This Forex pattern forms after an extended move downwards
  • This formation indicates that there will be a reversal in the market
  • This formation resembles is upside-down, thus its name Reverse.
  • We buy when price breaks above the neckline; see the chart below for explanation.

Reverse Head and shoulders Chart Pattern

 

Example of Reverse Head and Shoulders Pattern on a Currency Chart

Reverse Head and shoulders Chart Pattern in Forex Trading

Example of Reverse Head and Shoulders Pattern