Trading forex is no easy task. It takes a lot of time and effort to succeed, but most people can do it with the proper guidance and practice. There are many examples that traders can learn from, such as patterns that have worked for people in the past. Some of these patterns include head and shoulders or head and fists, but one pattern that works well is shoulder-head-shoulders.
British forex’s shoulders and head trading pattern is a price action trading strategy used to identify potential entries. The pattern marks the midpoint of a trend, so if you have been following a specific market for some time now, wait for this area to appear before taking any actions. This is because going against an established impulse usually results in mediocre results.
How to read shoulders and head trading patterns
This is known as a shoulder-head-shoulders pattern when three consecutive candlesticks with overlapping shadows occur (or simply ‘shoulder-head’). It is 80% accurate signalling that there will be an uptrend or downtrend after it occurs.
The price continues either up or down depending on where the pattern starts, but it is not until after the third candlestick that you can catch the whole move. This specific forex trading pattern has an 80% success rate, so it would be wise to use this information when looking at buying or selling currencies in your online account.
Draw a trend line
The first step would be to draw a trend line from one extreme towards the other. To do that, look at the high points and low points in your chosen timeframe. Let’s assume that there was a high of 50 pips and a low of 39 pips during that period. Draw a straight line connecting these two extremes, forming a slight slope channel.
Wait for price action
The second step requires you to wait for price action to close outside the trend line and the midpoint of the channel. All you have to do is look at any chart and take note of these two conditions so that you do not miss them when they happen. The head should be located on one end of the trend line, while shoulders will appear on both ends of the channel.
Depending on your market analysis, you can add more details into your strategy, such as adding a third shoulder near the breakout level or looking for volume confirmation to ensure that this breakout has some power behind it.
Check support and resistance levels
After identifying possible entry trades, check if support and resistance levels are nearby and whether these lines will get in your way of entering into a new trade. If the market is an uptrend, you will likely be selling at resistance areas and buying when support levels show up on your chart. The opposite happens during downtrends, where you sell positions near uptrend lines and buy positions near downtrend lines.
Place your orders
Finally, it is time to place your orders. Entering early without confirmation may result in getting rejected by the market and losing out on potential profits, so always wait for some price action signals before pulling the trigger.
Risks associated with using shoulders and head trading patterns
Trading is risky, period. However, shoulders and head patterns are indicators of price reversal pivoting on two levels of support or resistance. As you can imagine, if the price reverses double support/resistance, then there is a significant risk that this new trend may continue. Exploiting these patterns successfully takes considerable practice, but even more importantly, it requires patience to wait for the pattern formation and onset of new directionality since they don’t happen often.
If you are interested in learning more about trading techniques, contact a forex broker uk from Saxo Bank and practise different trading strategies on a demo account before investing your money.
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