Looking at adding rsi divergence confluence at the head of the setup.
What is head and shoulder telling us, that the current trend is coming to an end and is weakening, leading to a breakout reversal. Well what’s the best way to measure the strength of a failing trend? Rsi…we will look for divergence when the price makes that high
forming the head, foreshadowing that breakfown
on the second shoulder we can look for liquidity sweeps to further support our analysis
Here's a current example. Gold setting up on H1. Price showing strong divergence on RSI at head low. There's a liquidity sweep on the right shoulder, taking out that fractal low. Waiting to see what volume looks like as we approach neck line.
I'm using TradingView's default Head and Shoulder and Inverse Head and Shoulder indicators. The goal is to ultimately have a scanner running that shows which pairs are approaching neck line with an adjustable pip setting.
This is exactly why I put emphasis on liquidity grab and supply/demand zones. Notice at the shoulder how price pullsback but doesn't fully sweep that fractal high. Then look how price proceeds to break the neckline and pull back to come grab the liquidity before proceeding down. When there's liquidity left in the market, it lowers our chances of hitting TP because there's a chance price will return to grab the liquidity. If price sweeps liquidity before making its breakout, it will further cascade price in our direction.
What if we look for supply/demand or liquidity grabs/sweeps at the head AND shoulders and have different names for these setups depending on how much liquidity was absorbed? hmm
In this example, the left shoulder and the head get liquidity taken out. Left not as important, but still something to take into consideration. However the head being at a high and getting swept, is very significant. Trapped traders and stop hunts is a going to push price down
however, on the right shoulder, price leaves liquidity behind, so traders might wait for price to come back, or enter anyway. Volume does spike, and you have sweep at the head, so looks good.
