Alistair Schultz, Chief Market Analyst, walks us through the Head & Sholders pattern and some ideas on how to trade the pattern.
Hello, and welcome to an ACY Securities educational video. I'll be your host today, Alistair Schultz. And I'll be presenting through some of the stuff that I look at when it comes to my own trading. So the stuff that we're going to be covering today is actually a head and shoulders pattern. I'm going to go through what it looks like. Some examples on the chart, how I would place an entry myself and how to control that trade for profit via a few different ways of money management. So firstly, I'd like to introduce you to the head and shoulders pattern at the moment. I haven't got any candlesticks or any price attached to it. I'm just trying to give you the concept of what it looks like. So as you can say, it is looking a little bit mountainous, but it is commonly described. It is easy to observe. It comes. They are quite reliable. At times. If you find them on a chart, you can usually put a good place for support resistance, stop-loss entries and exits for positions. It is considered a reversal signal. You find them usually quite often, right next to support and or resistance. And sometimes it does get mistaken for a triple top, but the reality is a triple top, a double top, and a head and shoulders pattern are all reversal patterns and quite often mimic each other's behaviour.
So the head and shoulders pattern itself is, as you can see here on the board behind me, this is one that I've found in price, and it's always not always exactly perfect imagery, but it is the concept of it. As I iterated before it's found near resistance points. In this instance, it is a short position, head and shoulders. So you'd be trying to look for a short opportunity of it. Also, if you're in long already can provide you with a chance to get out of a position you're already in the shape. Isn't static. It can move around, but again, you can see here just like that. First-year illustration that mountainous look that comes up on it. It can be seen in any timeframe. It doesn't matter whether you're looking at a one hour, 15 minute or something greater like a monthly chart. You can find these patterns in pretty much everywhere. The difference on when and how or what timeframe it is that you look forward in will differ and how far you place your stops and take profits because obviously larger timeframe, usually a bigger pattern. It can also be inverted. Now, if it's inverted, you're looking for a long entry. And if you've already been in for a short position, you would consider it an opportunity for you to exit safely. It can be used for an entry on the top of this chart here that I've got presented. You can see a head and shoulders pattern that has been defined, and it allows you to capture the whole rundown this trend.
Now it can also occur at the opposite end. So even if you were to get in at the top and you were to see another pattern at the bottom, just like that, but the inverse version of it, you would find that you would have quite a lucrative run with good places to get in and out of your trade. Just like this I've the pattern is now on the bottom. And it has been seen at the end of a run and allows price to continue sticking back up. If it's at the end, take note of it, regardless of whether you are a fundamental or a technical trader, you may have just started a fundamental trade, looked at it and then found this pattern towards the end. That'd be a good place to get out. If you didn't have another idea of what might be going on or where a suitable place for exit would be.
How do we actually define the pattern? Well, the patent, as I said before, is a reversal pattern. It uses support and resistance to make swing highs and swing lows. But the important parts are in the diagram. I've got behind me at 0.1, we can say, we have our first swing high, a 0.2, we have a higher swing high. And then at 0.3, we have a lower swing high that is either equal to or below the first swing high at 0.1. Now, the idea of this would be that you would say you've had a test of price that has failed, and it has continued to come back down. We are looking for our entries at 0.4, after a break of support. Now, if we were going to be placing a trade, this would be the first method or the first way that you could consider doing it.
You would place your position at 0.4, you would have already established and defined that it is obviously a head and shoulders pattern. You would place a stop-loss with a little bit of breathing room above 0.2 at your highest swing high. Then you would measure the distance between entry and your stop-loss. And so for this instance, I've turned around and said, hypothetically, it's a hundred PIP and you would make your distance between your take profit, a hundred percent representation of the distance between your entry and your stop. So therefore the distance from entry to you take profit will also be a hundred pips. The second way you can do it is with a trailing stop. Now, this is the method I prefer to use. It is a little bit more involved, but nonetheless, it actually allows you to get better returns. At some times, especially at the beginning of a trend, instead of having a fixed tape profit, it allows you to have your stop loss at the same place and not actually run a take profit at all.
In this instance, you'd place your position at 0.4, let it trail get your first bounds. And then you would get a short swing height where you could put a place for resistance. At this point, you tried to stop that you had off the top downs where 0.5 is a couple of pips behind for some breathing room, and then let the run concurrently in the method. It's what I call half in half out, but as effectively, a combination of the prior two, you don't technically run a take profit, but instead you have a pending order to take out half your position whilst then remaining of your position is your trailed like a normal trailing stop. So here at 0.4, you have your entry price comes down, hits to where you would usually have your original take profit at. And then at 0.5 and you would then close half your position.
So if you entered with one lot, then it 0.5. When you get your first point of support, you would close half your position. And then at 0.6, you would move that trailing stop down for the remainder 0.5, lots that you still have running for a short trade. It is at this point in time. It actually de-risks your position entirely because you've already closed off half your profit, no matter where price goes from this point on it's a free trade in the eyes of the trader. So I hope that this sort of video has helped you a lot today. Feel free to send me a message. If you have any questions on it talktoal@acy.com and of course like, and subscribe the video so you can get more content from us on our educational staff and more things from me in the future. Have a good trading day ahead. And I hope you can put this into practice.
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