How to Trade the Head and Shoulders Pattern in Forex

The Head and Shoulders pattern is one of the most recognized trend reversal formations in forex trading, particularly during the end of an uptrend.

This pattern signals that a bullish trend may be nearing exhaustion and that a bearish reversal could be on the horizon.

Let’s explore how to identify and trade this powerful chart formation.

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🔺 What is the Head and Shoulders Pattern?

The Head and Shoulders pattern consists of three main peaks:

• The left shoulder (first peak)
• The head (highest peak)
• The right shoulder (a lower peak)

These three points form after a strong upward movement. A neckline is drawn by connecting the lowest points between the shoulders and the head. This neckline can slope upward or downward, but downward-sloping necklines often provide more reliable signals.

🖼️ Example:

When price breaks below the neckline, a bearish trend reversal is confirmed.

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📈 How to Trade the Head and Shoulders Pattern

1. Identify the pattern: Look for the formation of three peaks where the middle one (the head) is higher than the others.
2. Draw the neckline: Connect the two lowest points between the peaks.
3. Place a sell order: Set your entry just below the neckline.
4. Set your target: Measure the distance from the top of the head to the neckline — this is the projected move after the breakout.
5. Manage your risk: Use a stop-loss just above the right shoulder for risk control.

✅ Example Outcome:

Once the neckline is broken, price often drops by a distance similar to the height of the head. Don’t chase extra pips — take your profits!

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🔻 Inverse Head and Shoulders Pattern (Bullish Reversal)

The Inverse Head and Shoulders is the flipped version of the original pattern. It occurs after a downtrend and signals a possible bullish reversal.

• The pattern is made up of three valleys.
• The middle valley (head) is the lowest, and the two surrounding valleys (shoulders) are higher.

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📈 How to Trade the Inverse Head and Shoulders

1. Identify the pattern: Spot the three valleys with the head in the middle.
2. Draw the neckline: Connect the highs between the valleys.
3. Place a buy order: Enter above the neckline.
4. Set your target: Measure the distance from the lowest point of the head to the neckline, and project it upward from the breakout point.
5. Stop-loss suggestion: Place it just below the right shoulder.

✅ Example Outcome:

Once the neckline breaks, price often rallies with momentum. If your target is hit — lock in profits. You can even use a trailing stop if the trend continues further.

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📌 Final Tips

• The Head and Shoulders and Inverse Head and Shoulders patterns are best used on higher timeframes (H4, Daily) for stronger reliability.
• Use volume analysis or indicators like MACD or RSI for confirmation.
• Don’t rely solely on chart patterns — always consider the broader market context.

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