In this video we're taking a look at one of my favorite patterns.
The head and shoulders head and shoulders patterns are easy to see and that's what I like about them.
Because you want patterns that are easy to identify and that the market will pay attention to.
The first thing I would say is there is an inverse and a standard pattern the head and shoulders is
actually a negative pattern.
It's a bearish pattern.
The inverse of course is just the exact opposite it's bullish.
A head and shoulders is a pattern that shows a rally a trough a rally a trough and then a rally and
a breakdown.
These are the shoulders rallies one in three to be in the head.
You can see that it's taller than the shoulders.
There is a neck line where traders will identify a breakdown point and look a little bit more like this
and on a break of that neck line you shorted.
In this case or if it's inverse
it looked more like this the head you know just it's upside down the heads taller than the shoulders
which makes a lot of sense.
I would also point out that it does not have to be straight up or straight down.
It can be in an angle like this and think about the psychology of this.
You have a market that's moving in a particular direction.
The buyers feel good.
There's a little bit of a pullback and then they rally it again and at that point.
If you're in on the shoulder you think Okay good.
The trends working out in my favor.
Everything's good.
These people recognize that it's an uptrend and they want to get in on the action.
They see a little bit of a pullback but they're not worried.
This is a market that's been moving in their direction for a while.
Then the next rally shows a little less enthusiasm well these people are losing money right away.
And once we break the neck line which was the beginning of this rally or the beginning of the pattern
these people were all losing money.
Well what do you have to do when you're long of a market and you're losing money.
You have to get out and you get out by selling.
So it puts even more downward pressure here.
The exact opposite would be true in this scenario.
The sellers feel good.
They get a little bit of a pullback.
We're even lower at this point.
So it certainly is working out get a little bit of a pullback wouldn't be too worried about that.
But all of a sudden the market can't go as low once we get past the next line.
Everybody in this pattern is losing money.
So they have to buy to close out their position creating more upward momentum in this direction so let's
take a look at a couple of examples on this chart I see a head and shoulders after a.
This is a four hour the cable after a rally to the upside.
You can see that we rallied again and then rolled over the neck line would be this entire area here.
So when you look at this you can see that the buyers felt good and then they pulled back a little bit
which is you know it's normal.
And then they rallied even further.
So of course they're feeling good about their trade.
But the third the other shoulder showed signs of weakness and that has people nervous.
Everybody above the neck line now.
Once we break down below it is losing money.
So one of the things that makes
the head and shoulders so valuable to me at least is that there is a measuring stick love patterns with
measuring sticks.
You take the tallest part of the pattern to the neckline and in this case it's about one.
One hundred and ten pins from one thirty two to one thirty ninety five or so.
Once you break down below the next line you are moving
the height of that pattern in theory and that would be your target.
And you can see that clearly it worked out.
And in fact it worked out much better than that.
It kept going stop losses are easy.
You just put them on the other side of a shoulder because if they turns around and breaks above the
top of that shoulder that's the breakdown shoulder.
Well clearly the pattern didn't work out so that is an example of a head and shoulders now an inverse
head and shoulders as you know is just simply the same thing just other direction.
We have that pattern here.
You can see that we started to fall the sellers felt relatively good.
They feel even better there.
They don't feel quite so confident there.
Once they break through that neck line of the head and shoulders pattern in this case you've got a move
of about two hundred and twenty pips from the breakout at one forty two ish.
So you're looking for about one forty four point two zero about there.
You see clearly a hit that it went further and that's not uncommon a lot of times it will overshoot
but the pattern would be easy to trade in that scenario you would have your stop loss set there underneath
that shoulder you'd have your target set there you would either take your entire profit there or take
half or at the very least be a break even head and shoulder pattern are great because they're easy to
identify everybody in the world knows what they mean.
So therefore everybody pays attention to them giving more credence and more of a self-fulfilling prophecy
in this next video.
We'll take a look at double tops and double bottoms.