Offer your insight
Long time lurker, first time poster. H&S (and Inverse H&S) has kept me profitable for the entirety of my trading career. Could you replace H&S with some other pattern and see the same success? Probably. I do believe becoming a successful trader really boils down to finding a balance of being disciplined enough to routinely follow a system's rules (assuming the system is decent) and and human enough to not robotically enter every trade that sets up. Every setup is different, especially when you talk about chart patterns. As with any system, the best traders can take the context of the entire market, fundamental analysis and their system to filter every setup and in return increase their profitability. None of use are the best traders though are we? That's why I believe strike rate, or win percentage is the single most important metric to consider when choosing a system. Not only does it make managing your risk a lot easier, it's considerably less taxing on a traders mental stamina. This is why H&S remains my all time favorite system and pattern. Accuracy. The accuracy does come with a down side however. People have said that the pattern is too rare to exclusively rely on for a system. Those people probably only trade one time frame because one intrinsic benefit of trading chart patterns is that they appear on every chart - meaning every time frame. I do personally believe lower time frames are stronger. Could it be annoying to scan through every time frame on every pair? Yes. However it's worth it when you take into consideration how effective H&S really is. There's also the opportunity for a H&S scanner. (coders cough cough)
Head and shoulders formations consist of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down somewhat, generally occurring on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation. A neckline can be drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the head and shoulders top formation. It is quite possible that prices pull back to touch the neckline before continuing their declining trend. Most of the time, head and shoulders are not perfectly shaped. This formation is slightly tilted upward or downward.
Head and shoulders is a useful tool after its confirmation to estimate and measure the minimum probable extent of the subsequent move from the neckline. To find the distance of subsequent move, measure the vertical distance from the peak of the head to the neckline. Then measure this same distance down from the neckline beginning at the point where prices penetrate the neckline after the completion of the right shoulder. This gives the minimum objective of how far prices can decline after the completion of this top formation. The halfway point could be an ideal place for a take profit level.
Entry:
Wait for price to break neck line. The neckline drawn on the pattern represents a support level, it cannot be assumed that a head and shoulder formation is complete unless the support level is broken. Such breakthrough may happen to be on greater volume or may not. Breakthroughs should be observed with great care. Serious drops can occur if a breakthrough is more than three to four percent of price. (if price drifts through the neckline on small volume, there may also be a wave up in some cases, although it has been observed that such a rally normally will not cross the general level of the neckline before selling pressure increases and a steep decline occurs, after which prices may due to greater volume) It is quite possible that prices pull back to touch the neckline before continuing their declining trend.
Exit:
The half way point between the distance of the peak of the head and the neck line will be used for the first take profit. The full length can be the second.
Risk Management:
Stop loss can be above right shoulder or a 1:1 risk ration with TP 1
Position size should be align with the pips risked. With a 1:1 RR traders should usually keep a conservative lot size.
Long time lurker, first time poster. H&S (and Inverse H&S) has kept me profitable for the entirety of my trading career. Could you replace H&S with some other pattern and see the same success? Probably. I do believe becoming a successful trader really boils down to finding a balance of being disciplined enough to routinely follow a system's rules (assuming the system is decent) and and human enough to not robotically enter every trade that sets up. Every setup is different, especially when you talk about chart patterns. As with any system, the best traders can take the context of the entire market, fundamental analysis and their system to filter every setup and in return increase their profitability. None of use are the best traders though are we? That's why I believe strike rate, or win percentage is the single most important metric to consider when choosing a system. Not only does it make managing your risk a lot easier, it's considerably less taxing on a traders mental stamina. This is why H&S remains my all time favorite system and pattern. Accuracy. The accuracy does come with a down side however. People have said that the pattern is too rare to exclusively rely on for a system. Those people probably only trade one time frame because one intrinsic benefit of trading chart patterns is that they appear on every chart - meaning every time frame. I do personally believe lower time frames are stronger. Could it be annoying to scan through every time frame on every pair? Yes. However it's worth it when you take into consideration how effective H&S really is. There's also the opportunity for a H&S scanner. (coders cough cough)
Head and shoulders formations consist of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down somewhat, generally occurring on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation. A neckline can be drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the head and shoulders top formation. It is quite possible that prices pull back to touch the neckline before continuing their declining trend. Most of the time, head and shoulders are not perfectly shaped. This formation is slightly tilted upward or downward.
Head and shoulders is a useful tool after its confirmation to estimate and measure the minimum probable extent of the subsequent move from the neckline. To find the distance of subsequent move, measure the vertical distance from the peak of the head to the neckline. Then measure this same distance down from the neckline beginning at the point where prices penetrate the neckline after the completion of the right shoulder. This gives the minimum objective of how far prices can decline after the completion of this top formation. The halfway point could be an ideal place for a take profit level.
Entry:
Wait for price to break neck line. The neckline drawn on the pattern represents a support level, it cannot be assumed that a head and shoulder formation is complete unless the support level is broken. Such breakthrough may happen to be on greater volume or may not. Breakthroughs should be observed with great care. Serious drops can occur if a breakthrough is more than three to four percent of price. (if price drifts through the neckline on small volume, there may also be a wave up in some cases, although it has been observed that such a rally normally will not cross the general level of the neckline before selling pressure increases and a steep decline occurs, after which prices may due to greater volume) It is quite possible that prices pull back to touch the neckline before continuing their declining trend.
Exit:
The half way point between the distance of the peak of the head and the neck line will be used for the first take profit. The full length can be the second.
Risk Management:
Stop loss can be above right shoulder or a 1:1 risk ration with TP 1
Position size should be align with the pips risked. With a 1:1 RR traders should usually keep a conservative lot size.
Can't go broke making profit
