WEBVTT 00:03.350 --> 00:06.320 In this video we're taking a look at one of my favorite patterns. 00:06.320 --> 00:15.100 The head and shoulders head and shoulders patterns are easy to see and that's what I like about them. 00:15.110 --> 00:22.400 Because you want patterns that are easy to identify and that the market will pay attention to. 00:22.400 --> 00:32.420 The first thing I would say is there is an inverse and a standard pattern the head and shoulders is 00:32.480 --> 00:33.820 actually a negative pattern. 00:33.820 --> 00:35.090 It's a bearish pattern. 00:35.120 --> 00:38.020 The inverse of course is just the exact opposite it's bullish. 00:40.100 --> 00:51.240 A head and shoulders is a pattern that shows a rally a trough a rally a trough and then a rally and 00:51.240 --> 00:53.460 a breakdown. 00:53.470 --> 00:58.180 These are the shoulders rallies one in three to be in the head. 00:58.180 --> 01:01.160 You can see that it's taller than the shoulders. 01:01.180 --> 01:10.750 There is a neck line where traders will identify a breakdown point and look a little bit more like this 01:12.370 --> 01:15.000 and on a break of that neck line you shorted. 01:15.270 --> 01:17.670 In this case or if it's inverse 01:20.990 --> 01:26.170 it looked more like this the head you know just it's upside down the heads taller than the shoulders 01:26.200 --> 01:28.800 which makes a lot of sense. 01:28.810 --> 01:32.960 I would also point out that it does not have to be straight up or straight down. 01:33.100 --> 01:38.030 It can be in an angle like this and think about the psychology of this. 01:38.060 --> 01:41.160 You have a market that's moving in a particular direction. 01:41.540 --> 01:42.590 The buyers feel good. 01:42.620 --> 01:47.870 There's a little bit of a pullback and then they rally it again and at that point. 01:47.870 --> 01:50.420 If you're in on the shoulder you think Okay good. 01:50.420 --> 01:53.210 The trends working out in my favor. 01:53.210 --> 01:54.670 Everything's good. 01:54.770 --> 02:01.500 These people recognize that it's an uptrend and they want to get in on the action. 02:01.500 --> 02:03.680 They see a little bit of a pullback but they're not worried. 02:03.690 --> 02:06.490 This is a market that's been moving in their direction for a while. 02:07.350 --> 02:15.710 Then the next rally shows a little less enthusiasm well these people are losing money right away. 02:15.790 --> 02:20.380 And once we break the neck line which was the beginning of this rally or the beginning of the pattern 02:21.130 --> 02:22.720 these people were all losing money. 02:22.720 --> 02:26.590 Well what do you have to do when you're long of a market and you're losing money. 02:26.590 --> 02:29.050 You have to get out and you get out by selling. 02:29.470 --> 02:32.310 So it puts even more downward pressure here. 02:32.380 --> 02:35.340 The exact opposite would be true in this scenario. 02:35.350 --> 02:36.520 The sellers feel good. 02:36.520 --> 02:38.740 They get a little bit of a pullback. 02:38.950 --> 02:40.660 We're even lower at this point. 02:40.660 --> 02:45.300 So it certainly is working out get a little bit of a pullback wouldn't be too worried about that. 02:45.310 --> 02:52.080 But all of a sudden the market can't go as low once we get past the next line. 02:52.110 --> 02:54.280 Everybody in this pattern is losing money. 02:55.530 --> 03:05.330 So they have to buy to close out their position creating more upward momentum in this direction so let's 03:05.330 --> 03:16.440 take a look at a couple of examples on this chart I see a head and shoulders after a. 03:16.440 --> 03:20.650 This is a four hour the cable after a rally to the upside. 03:20.760 --> 03:33.620 You can see that we rallied again and then rolled over the neck line would be this entire area here. 03:33.660 --> 03:38.790 So when you look at this you can see that the buyers felt good and then they pulled back a little bit 03:38.820 --> 03:41.340 which is you know it's normal. 03:41.340 --> 03:42.840 And then they rallied even further. 03:42.870 --> 03:45.070 So of course they're feeling good about their trade. 03:45.240 --> 03:51.720 But the third the other shoulder showed signs of weakness and that has people nervous. 03:51.720 --> 03:53.440 Everybody above the neck line now. 03:53.460 --> 03:56.800 Once we break down below it is losing money. 03:57.050 --> 04:00.410 So one of the things that makes 04:03.330 --> 04:11.800 the head and shoulders so valuable to me at least is that there is a measuring stick love patterns with 04:11.800 --> 04:12.730 measuring sticks. 04:12.790 --> 04:17.370 You take the tallest part of the pattern to the neckline and in this case it's about one. 04:17.380 --> 04:24.040 One hundred and ten pins from one thirty two to one thirty ninety five or so. 04:24.100 --> 04:27.220 Once you break down below the next line you are moving 04:29.830 --> 04:32.550 the height of that pattern in theory and that would be your target. 04:32.560 --> 04:34.180 And you can see that clearly it worked out. 04:34.180 --> 04:36.190 And in fact it worked out much better than that. 04:36.190 --> 04:40.000 It kept going stop losses are easy. 04:40.000 --> 04:43.300 You just put them on the other side of a shoulder because if they turns around and breaks above the 04:43.300 --> 04:45.520 top of that shoulder that's the breakdown shoulder. 04:45.520 --> 04:55.050 Well clearly the pattern didn't work out so that is an example of a head and shoulders now an inverse 04:55.050 --> 05:02.450 head and shoulders as you know is just simply the same thing just other direction. 05:02.500 --> 05:05.880 We have that pattern here. 05:05.940 --> 05:10.470 You can see that we started to fall the sellers felt relatively good. 05:10.470 --> 05:11.700 They feel even better there. 05:11.700 --> 05:14.410 They don't feel quite so confident there. 05:14.550 --> 05:24.420 Once they break through that neck line of the head and shoulders pattern in this case you've got a move 05:24.540 --> 05:31.500 of about two hundred and twenty pips from the breakout at one forty two ish. 05:31.500 --> 05:38.090 So you're looking for about one forty four point two zero about there. 05:38.090 --> 05:43.180 You see clearly a hit that it went further and that's not uncommon a lot of times it will overshoot 05:44.110 --> 05:50.290 but the pattern would be easy to trade in that scenario you would have your stop loss set there underneath 05:50.290 --> 05:55.810 that shoulder you'd have your target set there you would either take your entire profit there or take 05:55.810 --> 06:02.940 half or at the very least be a break even head and shoulder pattern are great because they're easy to 06:02.940 --> 06:06.420 identify everybody in the world knows what they mean. 06:06.420 --> 06:12.210 So therefore everybody pays attention to them giving more credence and more of a self-fulfilling prophecy 06:12.730 --> 06:13.910 in this next video. 06:13.920 --> 06:17.130 We'll take a look at double tops and double bottoms.