This time I have a Forex video example of a classical pattern that often appears on the Forex charts. This is the Head and Shoulders chart pattern that usually reverses the bullish trends to set the beginning of a fresh bearish run. This is what actually happened on the chart.
Signals of the Head and Shoulders Trade
- The price moves above a bullish trend that suddenly got broken in bearish direction.
- The USD/CHF was consolidating at the same time, where the sideways price move caused the breakout.
- The price action creates lower tops and lower bottoms in the time of the trend breakout.
- The consolidation resembles a Head and Shoulders chart pattern.
- The breakout through the Neck Line of the Head and Shoulders confirmed the potential reversal on the chart.
- I short the Swissy on the assumption that the price is about to drop.
Stop Loss and Target of the Trade
I placed my Stop Loss order above the second shoulder of the Head and Shoulders pattern. This way the trade is protected from eventual sharp price moves. This is a good level for the Stop Loss order. If the price breaks the area around the second shoulder, the chance for closing a successful trade will be minimal.
My take profit order stays at a distance equal to the vertical size between the tip of the Head and the Neck Line. This is the minimum potential expected from every Head and Shoulders chart pattern.
Live Trading Example
The gray rectangle in the video is the tool I use to measure the size of the Head and Shoulders chart pattern. I apply this size starting from the moment of the breakout as a target of my trade.
I generated profit of 7 pips, which is approximately 0.07%. The trade took about 30 minutes, which is a relatively short period of time in terms of the generated profit.
This trade is a good example of how a Head and Shoulders chart pattern works during trend breakout and reversal.