This time we talk about one of the famous Chart Pattern in Trading.
The Head and Shoulder Pattern.
For those who have no expierience in trading yet, i ll explain this pattern first before going into its secret.
Here is a picture of a HS Pattern in a very simplified way.
We have a left shoulder, a higher Head and another lower shoulder on the right. The two lower points between the shoulders and the Head are connected with a line, the so called neckline.
When price breaks the neckline, this is the indicator for opening a sell position.
Usually the price will rise after breaking this line back to retest the neckline and than starts falling again. Traders who are more securitiy in their trades will enter after the retest.
The height between the Head and the Neckline determines how far the price will drop.
So, that is what you usually learn, when you search on google for the HS Pattern. But there is one important details, nearly no one talks about. Whyever.
What is also important with this pattern?
both shoulders can be different high, there is no need to have the same top
both lower point can also vary in their height, that means the neckline can look rising or falling
a falling neckline is a better indicator than a rising one, that menas the probability of the price falling far way down ist better
a rising neckline is not bad, if the HS Pattern is fully completed, butit has a higher possibility that the price (Although it breaks the neckline) will rise back up above when retesting the line (thats why security trader wait for the retest)
the higher the timeframe this Pattern is appearing, the better it is as an indicator for price action
Now, you waited enough, here is the Secret : THE VOLUME
Thats it? Some of you will be dissapointed now, but yes thats it. And thats so important.
Without looking at the volume every HS Pattern is a game of chance.
It is so important, that you look at the volume. I cant say it enough.
The volume must decrease during this pattern.
As you can see on the picture above, thats how it should look like.
Not every Volume bar has to be lower than the one before, most important is the bar that is forming the top of the shoulders and the head (yellow lines).
During my last years of trading i recognized that the volume is one of the best indicators when trading chart patterns.
Based on my experience, when you find a HS Pattern with a decreasing volume, you can enter the trade much earlier than explained above. You do not have to wait for the neckline breakout. You can already enter when the right shoulder reaches its top. (look at the candle sticks on the chart to find it or use fibonacci if you want)
A HS Pattern without a fitting volume is much more risky and will often turn out to be wrong, even if there is a breakout at the neckline.
Thats it for today.
Later on i will talk about the reverse HS Pattern.
Hope you like my articles and they can be helpful for your further trading.
Feel free to "buy me a coffee", i would really appreciate that.
Stay healthy