Following on from the break it has dropped back and then tested the neckline and resumed it direct downwards.
Head and shoulder patterns are not very clear, don’t expect the real charts to be perfectly clean and symmetrical, they will provide more of a challenge. To be able to trade these patterns we have to spot them on real time charts as they happen and not after they are no longer relevant.
The bottom line, which is called the neckline and is actually a support level, might not always be a straight line. It might be an ascending or descending line, which makes it much more difficult to spot.
Inverse Head and Shoulders
This is the mirror image of the normal head and shoulders where the head is the lowest point and a break through the neckline would signal a BUY.
Below shows and incomplete head and shoulders pattern. The neckline was not broken so the signal has not been triggered. This is an example of to show that evolving head and shoulders patterns will not be clean and clear and can make it difficult to spot. This is why some prefer to enter on a pullback and the retest of the neckline. This option is safer because now we know that this is not just a fake-out and again can be used in conjunction with other analysis tools.
Head and Shoulders consists of a high peak in the middle and two double peaks on either side of that one as can be seen in the illustration below. The higher peak is the head and the other two lower ones are the shoulders. Head and shoulders patterns are relevant when the neckline is broken. Once the neckline is broken, we may look to open the trade on the opposite side of the head and shoulders, which means we have to sell. Some traders enter immediately and some prefer to enter on a pullback and the retest of the neckline. The latter option is safer because now we know that this is not just a fake-out. The amount of pips targeted in this strategy is the same as the amount of pips between the top of the head and the neckline.
On the below chart setup you have USDCAD forming a Head and Shoulders pattern. To start the pattern you have a strong move upwards to the neckline. There is then a first high which is taken as the shoulder, this is usually but not always, as can be seen below, followed by a test of the neckline before a further move upwards to create the head of the pattern. After the bullish trend reach exhaustion level, the price falls quickly back to the neckline level before one final increase to form the second shoulder. The second shoulder will show a very similar level to the first and will be followed by a drop back through the neckline and a further fall.
Once the neckline has been broken through it would signal a reversal in trends and in the case above you would go short.