Head & Shoulders Forex Reversal Pattern Trading Strategy

When in need of a reliable reversal pattern, the Head and Shoulders pattern offers a lot more when combined with basic trading indicators.

HeadShoulders-top-forex-rev

The pattern is shaped in form of a peak (shoulder), tailed by a higher peak (head), and one additional lower peak (shoulder).

Learn how to buy and sell forex with the Head & Shoulders forex reversal pattern trading strategy.

Chart Setup

MetaTrader4 Indicators: HalfTrend-1.02.ex4 (default settings), KDJ.ex4 (Input Variable modified; nPeriod=27)

Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minute, 30-Minute, 1-Hour, 4-Hour, 1-Day

Recommended Trading Sessions: Any

Currency Pairs: Any pair

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Download the Head & Shoulders Forex Reversal Pattern Trading Strategy

Buy Trade Example

Fig. 1.0

Strategy

Long Entry Rules

Enter a buy entry in the market if the following indicator or chart pattern gets displayed:

  1. If the “Head and Shoulder” pattern forms on the activity chart (depicted by levels 1, 2 & 3) plus price breaks above the neckline as seen on Fig. 1.0, price is said to be pressured higher, hence a trigger to go long.
  2. If the dodger blue upward pointing arrow and the downward spiked line of the HalfTrend-1.02 custom indicator forms below price bars (refer to Fig. 1.0), the market signal is said to be bullish.
  3. If the red line of KDJ custom indicator break and stays above the 50.00 level as seen on Fig. 1.0, the sentiment in the market is said to be bullish, hence a buy signal.

Stop Loss for Buy Entry: Place stop loss 3 pips below immediate support.

Exit Strategy/Take Profit for Buy Entry

Exit or take profit if the following rules or conditions are in place:

  1. If price breaks below the neckline after a confirmed breakout, an exit or take profit is advised.
  2. If the HalfTrend-1.02 custom indicator forms a red downward pointing arrow, and an upward spiked red line aligns above price bars as depicted on Fig. 1.0, an exit or take profit is recommended.
  3. If the red line of the KDJ custom indicator breaks below the 50 level, an exit or take profit is advised.

Sell Entry Rules

Enter a sell order if the following holds true:

  1. If the “Head and Shoulder” pattern forms on the activity chart (illustrated by levels 1, 2 & 3) plus price breaks below the neckline as shown on Fig. 1.1, price is said to be pushed lower, hence a trigger to go short.
  2. If the red downward pointing arrow and the upward spiked line of the HalfTrend-1.02 custom indicator forms somewhat above price bars (refer to Fig. 1.1), the market signal is said to be bearish.
  3. If the red line of KDJ custom indicator break and stays below the 50.00 level as seen on Fig. 1.1, the sentiment in the market is said to be bearish, hence a sell signal.

Stop Loss for Sell Entry: Place stop loss 3 pips above immediate resistance.

Exit Strategy/Take Profit for Sell Entry

Exit or take profit if the following rule or conditions are in place:

  1. If price breaks above the neckline after a confirmed breakout, an exit or take profit is advised.
  2. If the HalfTrend-1.02 custom indicator forms a dodger blue upward pointing arrow, and a downward spiked dodger blue line aligns below price bars as depicted on Fig. 1.1, an exit or take profit is recommended.
  3. If the red line of the KDJ custom indicator breaks above the 50 level, an exit or take profit is advised.

Sell Trade Example

Fig. 1.1

Free Download

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About The Trading Indicators

The HalfTrend-1.02 custom indicator defines reversal within the market, and it does so by combining an upward blue facing arrow along with a downward spiked line place below price bars to signal a buy, while a downward pointing red arrow with an upward spiked line aligned above price signals a sell.

The KDJ indicator for MetaTrader 4 is derived from the Stochastic with the one difference being the addition of the J line.

This implies that the KDJ indicator has a total of three lines; %K%D%J.

A Head and Shoulder pattern is a trend reversal price formation that forms price peak (shoulder), trailed by a higher peak (head), and an additional lower peak (shoulder).

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