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The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use this in the stock market, forex market, and futures market. For the full article with links, images, and discussion, click here: www.informedtrades.com/3047-head-shoulders-pattern.html


VIDEO TRANSCRIPTION:

As we have learned in previous lessons, double tops and double bottoms are forex, futures and stock chart patterns which show that the momentum needed to break a specific level of resistance for the double top and support for the double bottom is not there. When these patterns show up on a stock, futures or forex chart day traders will look for a reversal of the current trend.

In this lesson we are going to look at a chart pattern which also shows that the momentum needed to break a support or resistance level is slowing which is known as the head and shoulders pattern and the reverse head and shoulders pattern. Once we have a sound understanding of how to spot these patterns we will then look at a specific strategy for trading these patterns when they appear on a chart.

A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern.

The head and shoulders pattern is thus seen as a potential reversal pattern and day traders will pay special attention to this pattern when it occurs on an uptrend, and will look to trade a potential reversal of the uptrend should the pattern play out. For further confirmation that the potential for a reversal is high traders often give more credibility to a falling neckline than they do a rising neckline.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern and is defined by one trough, followed by a second lower trough, which is then followed by a third higher trough, and then finally a break above the resistance level established by the two peaks formed by the pattern.

the reverse head and shoulders is basically showing the sellers trying 3 times unsuccessfully to take the market lower before finally giving into the buyers who theoretically retain control after the 3rd failure. Like the Head and Shoulders Pattern, the Reverse Head and Shoulders is seen as a reversal pattern, and traders of the stock, futures and forex markets will pay special attention to this pattern when it occurs as part of a downtrend should the pattern play out. For further confirmation that the potential for a reversal is high, day traders will look for a rising neckline.

1. Intro to Technical Analysis
2. Introduction to Dow Theory
3. Second 3 Tenets of Dow Theory
4. How to Read Stock Charts
5. How to Trade Support and Resistance
6. Multi Time Frame Analysis
7. Introduction to the Double Top and Double Bottom Charting Pattern
8. How to Trade Double Tops Like a Pro
9. How to Trade the Head and Shoulders Pattern Part 1
10. How to Trade the Head and Shoulders Pattern Part 2
11. How to Trade the Wedge Chart Pattern Like a Pro Part 1
12. How to Trade the Wedge Chart Pattern Like a Pro Part 2
13. How to Trade the Flag/Pennant Patterns Like a Pro Part 1
14. How to Trade the Flag/Pennant Patterns Like a Pro Part 2
15. How to Trade Triangle Chart Patterns Like a Pro Part 1
16. How to Trade Triangle Chart Patterns Like a Pro Part 2
17. Learn to Trade with Technical Indicators
18. How to Trade Moving Averages Like a Pro (Part 1)
19. How toTrade Moving Averages Like a Pro (Part 2)
20. How to Trade the MACD Indicator Like a Pro (Part 1)
21. MACD Indicator: Trade it Like a Pro (Part 2)
22. How to Trade the Relative Strength Index (RSI) Like a Pro
23. How to Trade Stochastics Like the Pro's Do
24. The Difference Between the Fast, Slow and Full Stochastic
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
26. How to Trade the Average Directional Index (ADX)
27. How to Trade the Parabolic SAR
28. How to Trade Candlestick Chart Formations Part 1
29. How to Trade Spinning Tops and Doji Candlestick Patterns
30. How to Trade the Bullish/Bearish Engulfing Candlesticks
31. How to Trade the Hammer Hanging Man Candlesticks
32. How to Trade the Morning/Evening Star Candlestick Pattern
33. How to Trade the Inverted Hammer/Shooting Star Patterns
34. Why Most Traders Lose Money and The Solution
35. Why Traders Hold On to Losing Positions
36. Two Trading Mistakes Which Will Destroy Your Account
37. Herd Mentality is the Psychology That Leads to Big Trading Losses
38. Profit Expectations: What Millionaire Traders Know
39. How to Join the Minority of Traders Who Are Successful
40. How To Determine Where to Put Your Initial Stop Loss Order
41. How to Use the Average True Range (ATR) To Set Stops
42. How to Up Your Chances for Profit When Setting Stops
43. How to Reduce the Chances of Being Stopped Out on a Trade
44. How Successful Traders Use Indicators to Place Stops
45. Stop Your Mind From Causing You to Take Profits Too Soon
46. How To Use Trailing Stops
47. Why Position Sizing is So Important in Trading
48. Why Fixed Position Sizing Is Not the Best Way to Trade
49. Trading The Martingale and Anti Martingale Strategies
50. How to Set Trade Position Size for Maximum Profits
51. Maximize Trading Profits with Correct Position Sizing 2
52. Fundamental Analysis and The US Economy
53. A Simple Explanation of the US Economy for Traders
54. Simple Explanation of The US Economy For Traders Part 2
55. The Business Cycle and Fiscal Policy - What Traders Know
56. How Interest Rates Move Markets
57. What Traders Know About Interest Rates Part 2
58. What Traders Need to Know About The Structure of The Fed
59. How the Fed Changes Interest Rates
60. How to Determine When the Fed is Going to Change Rates
61. Why Markets Move Ahead of Interest Rate Announcements
62. How to Trade the GDP Number (Part 1)
63. The Components of the Gross Domestic Product (GDP)
64. Intro to Trading Non Farm Payrolls (NFP's)
65. Trading the News - Economic Numbers - Retail Sales
66. Trading the News - Economic Numbers - ISM Manufacturing
67. The Producer Price Index (PPI)
68. The Consumer Price Index (CPI)
69. Trade the News - Existing Home Sales Index
70. How To Interpret the Consumer Confidence Index (CCI)
71. How to Interpret the Index of Leading Economic Indicators
72. The Advantages and Disadvantages of Day Trading
73. The Advantages and Disadvantages of Swing Trading
74. The Advantages and Disadvantages of Position Trading
75. How to Keep a Trading Journal
76. The Most Important Attributes of a Good Trading Journal
77. The 20 Components of a Successful Trading Plan

This is a series of 77 short video lessons meant to give traders an introduction to the basics of trading as well as the components necessary to develop a profitable trading plan.