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How to trade head and shoulders chart pattern?

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No matter how you call it, head and shoulders or any other name, it is the pattern that is showing us clearly that buyers are running out of steam while bears are gaining momentum.

The market momentum is shifting slowly from buyers to sellers.

The lower high, the first sign of a downtrend is formed.

Now, in the area of the neckline, it is time for confirmation.

If it closes below the neckline, it will create a lower low, and the bearish market structure will be created.

Next thing for you is looking for an entry confirmation that should happen on the retest of the broken support (neckline).

If it gives sign such as bearish engulfing or bearish pinbar followed by profitable risk-reward, you got a trade opportunity.

Here is an example:

Do not focus on the entire chart pattern, go step by step as we did in the previous lesson.

It is not bearish because some smart guy told it is bearish.

It is a clear example of how highly bullish trend turns slowly but steady into bearish.

Firstly by not forming the higher low which was still not a big concern.

But after it created lower high, it became serious.

It was clear that the uptrend is over and now it is the question are we either going to enter sideways market or we are going to form lower low and create bearish market structure.

As shown in the photo, after breaking below the support (neckline), it turned the bullish trend into the bearish by forming a lower high and lower low.

That’s the reason why this pattern is bearish.

Once it makes downtrend confirmation, you are looking for an entry.

Perfect entry would be on the retest of the broken support (neckline) but only if you get confirmation.

The confirmation would be the bearish sign on the retest such as bearish pin bar or bearish engulfing candlestick.

Don’t look for perfection.

One shoulder could be higher than the other one, the bottoms of the pullbacks from highs could be lied out around neckline; it doesn’t have to be at the same price level.

The point is not in perfection but in the process of changing the bullish market to bearish one throughout this chart pattern.

We all want to see perfect entry setup but what the point is trading the setups with positive risk-reward.

That’s the type of trading that will make you profitable in this game called trading.

Trading is about looking for trades with profitable risk reward that get confirmed by either technicals or fundamentals.

In the real trading world, you will barely see perfect chart pattern.

If something looks perfect, you have to know that it will be obvious to others as well.

When the majority sees something, it can be easily manipulated by the “smart money,” and it happens over and over again.

Here is the Head and Shoulders chart pattern that maybe doesn’t look perfect but it fulfills all the rules it has to.

Starting with the neckline, it was established in the area that previously acted as a resistance.

After forming a left shoulder, head, and right shoulder, we saw a breakdown of the neckline area.

After you see a close below neckline, you have to be ready for the retest.

If that offers you bearish sign, you have confirmation and you can take the trade if you have profitable risk-reward on that trade.

The left shoulder is not in the same line as the right shoulder.

It doesn’t have to.

The point is that pattern changes bullish market conditions into bearish.

The equal position of shoulders won’t make it even more bearish.

The target depends on your trade management.

One of the areas we like to use as the target is the beginning of the uptrend that led to this chart pattern.

The second way is to measure the distance between the neckline and the head and use the distance to project the target for the move down.

It has to be your own choice because you are the one that manages the trade and it has to follow your rules.

All in all, this is a great example of trade opportunity that happens after valid head and shoulders.

It was quite obvious but it doesn’t have to be.

One more time, the bearishness doesn’t come from its shape or name but because it turns bullish market (higher highs and higher lows) to bearish (lower highs and lower lows).