Abstract：The currency pair you’re watching crashed and quickly reverses. You don’t know if it is safe to enter just yet. You stay on the sidelines while many of your friends are making money trading the same currency pair.
That is such a frustrating situation to be in.
The currency pair you‘re watching crashed and quickly reverses. You don’t know if it is safe to enter just yet. You stay on the sidelines while many of your friends are making money trading the same currency pair.
That is such a frustrating situation to be in.
You would want to be in the trade earlier than most participants to make more money and have boasting rights. When the crowd starts entering the same trade, you can smile at them because you have been in the green for a while now.
The question is how can you enter before the crowd？ How do you know when to enter to avoid getting wiped out？ Look out for the head and shoulderschart pattern. When you spot it, you can be confident that a reversal is on its way.
Lets use the most traded (also my favorite) currency pair as a case study - EUR/USD.
Spot It Right
#1 Market Tops
Besides the market structure, volume is also critical in assessing the chart patterns validity. It has to be declining at the right shoulder which is shown in the charts below.
The neckline of the head and shoulders chart pattern can be horizontally or sloping.
Knowing the above, what should this pattern look like？
· The “head” (peak) is surrounded by a “shoulder” (lower peak) on each side
o The shoulders dont have to be equal in height and breadth
· Volume is usually the heaviest at the left shoulder
· Volume continues to be heavy towards the head
· Volume is lower at the right shoulder
· A break in the neckline (you'll see it in the section Show Me The Money)
#2 Market Bottoms
At market bottoms, you‘ll see an inverted head and shoulders chart pattern instead. It is exactly the same as the head and shoulders chart pattern discussed above, just that it’s flipped upside down.
Lets have a look at how the inverted head and shoulders chart pattern should look like.
· The “head” (trough) is surrounded by a “shoulder” (shallower trough) on each side
o The shoulders dont have to be equal in depth and breadth
· Volume is usually the heaviest at the left shoulder
· Volume continues to be heavy towards the head
· Volume is lower at the right shoulder
· A break in the neckline (you'll see it in the section Show Me The Money)
Show Me The Money
#1 Breakout Trade
· Watch for price to break the neckline
· Enter your position according to the direction of the breakout
· Set your stop loss
· Set a profit target (based on the next support/resistance level)
#2 Pullback Trade
· Watch for price to break the neckline
· Wait for the price to pull back to the area near the neckline and enter your position
· Set your stop loss
· Set a profit target (based on the next support/resistance level)
Conclusion
It pays to wait for prices to form a pattern before entering after a crash because the first few rallies are usually deceiving.
When a currency pair is rallying and at a significant top, wait for a pattern to be formed to save you from all the agony and losses from buying the top.
「About The Author」
An independent trader who seeks to educate through his own trading
experiences, Jay began his own trading journey at the age of 22.
He is a self-taught trader who has read more than 200 books on
trading and investment since college and created his trading
methodologies modelling after several successful veteran traders.Jay has
since amassed 10 years of experience trading different market
conditions with consistency. Of the many disciplines in trading, he
specializes in trading options, swing trades on equities,
currencies,futures and contract-for-difference (CFDs).
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