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  • Hi Traders. Philip Thygesen here from www.stock-market-strategy.com Before I start I just want to say that trading

  • involves risk and hard work. So please do your own due diligence before trading for

  • real money. Today I am going to talk about Head & Shoulders. I will explain the requirements

  • for this chart pattern and how to spot them. Furthermore I will explain the psychology

  • behind the pattern and in the end show you how to trade the Head & Shoulder pattern.

  • If you go to www.stock-market-strategy.com you will find a tab called education, chart

  • patterns and Head & Shoulders. Here you will find a written summary including two charts;

  • one showing you the requirements and the other one showing you how to trade the pattern.

  • Head & Shoulders is a reversal pattern meaning we will be looking to catch the beginning

  • of a new trend. The Head & Shoulder pattern is a real time tool whereas an indicator is

  • lagging. This is one of the reasons why this pattern is widely used. Another reason for

  • its popularity is that the pattern is very easy to spot. I will show the requirements

  • so you can spot them for yourself in the future.

  • First we need an established trend prior to the pattern. This is very important because

  • the Head & Shoulder is a reversal pattern. So it needs a prior trend to reverse. Second

  • then you need a left shoulder. Third you need a head that is higher than the left shoulder.

  • After that you need a right shoulder which is lower than the head. And the fifth is a

  • neckline. A well defined trendline which goes from the retracement after the left shoulder,

  • to the retracement after the head. And here is the most important thing about this pattern.

  • It is not a confirmed Head & Shoulder pattern until we get a close underneath this neckline.

  • It's very important for you to remember that. Number 7 is not a requirement but it

  • is something we often see. That's where support becomes resistance. Price action comes

  • back up and tests this area.

  • I like this pattern because I understand why it works. It uses psychology in trading because

  • you can see when other traders are in emotional and financial pain. Here is an example: We

  • see an uptrend so people will be buying the retracement after a new high. So they buy

  • this retracement. We make a new high which is the head. So they buy this retracement

  • here. Then it climbs and forms that lower high which is the right shoulder. When it

  • then gets rejected fast like here and drops quickly and closes underneath this trendline

  • people are now under water. They are losing money. So this pattern feeds on losing traders.

  • Head and Shoulders can be used for both analysis and entries. First I will show you how to

  • use it for analysis. Here you see the real estate sector. You see we have an uptrend

  • prior to 2007. Then we get a Head & Shoulders. I know it's not a perfect Head & Shoulder

  • because the right shoulder has two peaks here. But there is a saying : you can be a perfect

  • chartist or you can make money trading chart patterns. I prefer making money on the chart

  • patterns. Here we have got a close underneath the trendline. The neckline which tells us

  • that we have got a trend reversal. So if people investing in real estate analyzed this sector

  • they would have avoided buying new apartments or houses or off-plan projects because we

  • got a trend reversal happening in the real estate sector.

  • Ok. Now you know the theory and the psychology behind this pattern. Now we will show you

  • where you can go short. There are 3 places to go short. The first one is very aggressive

  • because you assume it's going to be a Head & Shoulder pattern. This will give you a good

  • risk to reward, but a lower hit rate. Down here it's less aggressive because this is

  • a trade when you get the confirmation. It gives you a higher hit rate but not as good

  • risk to reward. The third one gives you a good risk to reward and a high hit rate but

  • you will sometimes miss the trade. It will not always come back and test the resistance.

  • Ok you have done your analysis. You know how to spot the Head & Shoulders .You also know

  • where to go short. Now we need to know how to go short. The first trade here, the aggressive

  • one you see that lower high. The day after we open underneath those two bars and closed

  • down here. When it closes the bar that's your entry. That's because we are catching

  • the prior 2 bars traders. It's called a shock. It opens up here, climbs. Next day

  • people buy it still but then the day after again we gap down underneath those 2 bars.

  • People are shocked that it didn't go higher and are suddenly trapped in a losing position.

  • The second is more by the book. It's a close underneath the neckline. That confirmation.

  • But it is important that it is a close. The third one is what I call a shooting star if

  • I am using candle sticks. But when it is bars I am calling it a topping tail. It's because

  • it opens here, move up and then it moves down the same day and closes down here. It shows

  • that there are many sellers waiting to go short up here and that's why it gets pushed

  • down the same day. It shows weakness. So that's my entry at the opportunity 3.

  • This ends today's video. I hope you have enjoyed it. Please remember to subscribe to

  • the channel so you don't miss out on future videos.

Hi Traders. Philip Thygesen here from www.stock-market-strategy.com Before I start I just want to say that trading

Subtitles and vocabulary

A2 BEG US pattern shoulder head shoulder head neckline reversal

How The Pro's Trade Head & Shoulders Chart Pattern Analysis

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