The Head And Shoulder Pattern Forex Swing Trading Strategy

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The Head And Shoulder Pattern Forex Swing Trading Strategy

This swing trading system is based on a reversal pattern that is mostly seen in uptrends. This is easy to identify and can be seen in any timeframes. This method is applicable to day trading and swing trading.

The head and shoulder pattern will form during an uptrend when the price slows down and forces of supply and demand and will be in balance. Sellers come in at the highs (left shoulder) and then the downside is probed, which will indicate the beginning of the neckline. The buyers then return to the market and push prices to a new high which is now the head. In this case, the new high is not sustained as the price falls back down because the sellers push the price down to create a continuing neckline. Buyers enter again pushing the price up to a high, but this high does not exceed the previous high (the head). This high is the right shoulder. Sellers get in and push the price down and this time, the neckline is in the intersection. Buyers may get in here and push the price up to test the neckline that was intersected which would now act as a resistance. Sellers get in to push the price down.

Trading rules:

Option 1:

  1. The candlestick must break the neckline in a downward direction.
  2. Place a sell stop order just a few pips, about 3-5 pips under the low of the candlestick.
  3. Place you stop loss 3-5 pips above the high of the right shoulder.

Option 2:

  1. After the price breaks the neckline, wait for the price to rally back up to touch the neckline. The neckline is now a resistance.
  2. Place a sell stop order 3-5 pips below the low of the candlestick after it touches the neckline.
  3. Place you stop-loss at least 10-50 pips depending on which timeframe you are trading in. Try to use reversal candlestick patterns as your short entry confirmation on this option 2 entry style.

Consider several options to take profit. First is the 1:3 risk and reward ratio which is you have to take the amount 3 times what you risked in pips and the second option would be taking profit on the previous swing high or swing low.

Open EURCAD daily chart to view template.

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