Trading Class 101: Price Action Trading (Part 8) – Head and shoulders pattern and how to use it

In this section, we will learn together about the head and shoulders pattern and how to use them in trading.

See more about Price Action:

1. Head and shoulders pattern

Head and shoulders pattern (head and shoulder) is one of the typical price patterns in trading and can be combined very well with Price Action (this pattern itself also reflects price action in the market).

Head and shoulders pattern will have 2 forms:

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  • Shoulder, head and shoulders are favorable
  • Head and shoulders inverse

1.1. Head and shoulders pattern

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Head and shoulders pattern

Characteristic

  • Shape: resembling the head and shoulders of a human, with the left and right shoulder equal and lower than the head.
  • Includes “head”, “left shoulder”, “right shoulder” and neckline (black line)
  • Usually signals an uptrend reversal.

Explain

In order not to be “mechanical”, I will explain this model in detail with a trend so that you can understand:

  • Before the pattern appeared, assuming the market was in an uptrend, then the “head” was the new high, higher than the “left shoulder”.
  • Next, the price corrects to the support (black line), the price bounces up.
  • At the time of the “right shoulder” formation, it was clear that the uptrend was weakened as the price was unable to break through the previous peak (which was the “head”) to resume the trend.
  • After that, the price did not respect the support (neckline) but broke through. At this point, if we just use the trend, we can see that a downtrend has formed with the “right shoulder” lower than the “head” which is the back high lower than the previous high, along with that the back low is lower than the previous low. prior to.
  • Then, we short, price retraces to resistance (neck-line), we enter, stop loss on right shoulder.

1.2. Inverse head and shoulders pattern

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Inverse head and shoulders pattern

Is a significant trend reversal pattern.

The interpretation of this reverse pattern is completely similar to the forward model:

  • First, the price is in a downtrend, the “first” point is the lower bottom area than the previous bottom.
  • The price bounces up, for the downtrend to continue, the price must create a lower bottom lower than the previous one (the “head” area).
  • However, the sellers can only push the price down to the right shoulder, the price cannot fall lower (the selling force is weak now, the buyers have joined the market).
  • Price bounces, breaks resistance. Then, an uptrend is formed.
  • We wait for the price to pull back to support (the resistance area has just been broken), entry, stop loss below the right shoulder.

2. Some examples of using the head and shoulders pattern

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In the COMPUSDT chart, 1H frame, you can see a head and shoulders pattern formed and confirmed when the price broke out of the green area.

In this example, you can see that the price has a retest span so we can re-entry if we don’t catch the previous breakout candle.

vai dau vai trading 4

Similarly, a favorable head and shoulders pattern appeared in the 15m OGN/USDT chart, the price then broke and fell.

3. Some experiences and notes when using the head-shoulder-shoulder model

First, each pattern or trade has a probability, so if you use it and encounter a stoploss, it is very normal. You can back-test many times to draw the win rate with the head and shoulders model and the experience when using it to improve the win rate.

Next, when using the shoulder-head-shoulder model, you should combine it with trend.

Eg

When the main trend is uptrend (4H frame for example), you see 15m is falling, and maybe this downtrend is just a minor correction. At the 15m frame, you see an inverse head-shoulder pattern appearing to create a bottom. Then you can go long according to this pattern, although against the small trend, but in favor of the main trend => the winrate of the order will be higher.

Should wait for confirmation of the new model to enter the order. Many brothers enter orders when only the right shoulder appears, which is very risky. You should wait for confirmation before entering the order to increase the winning rate.

Usually, the correct stop loss is above/below the right shoulder. However, in many cases, the neckline area can form a nice setup, you can flexibly move the stoploss above/below that area to optimize R:R.

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