Trading With The Figure «Head And Shoulders»
The effective trade on Binomo platform is possible without indicators and other tools, based on visual estimation only. In this article we will study the popular technical analysis figure «Head and Shoulders».
Almost everyone knows about this pattern, even the beginning traders. But indeed the potential of this figure is much wider that it may seem at first sight. In this article all the nuances related will be considered.
What is it and what do you eat it with?
«Head and Shoulders» is a figure of technical analysis looking like a pattern formed on the currency chart, resembling a head with two shoulders in shape. Outwardly it looks like three sequential price ceilings, the middle one of which is the biggest and two extremal ones are just about equal in size.
«Shoulders» shall be circa 1.5-2 times less in height than the «head». If all three maximums are circa equal in height, then the figure is called otherwise («Triple peak»).
The spectacular example of the pattern is shown on the image below. All three maximums shall have the minimum point located on one level. Reflecting from the supporting line the price shapes «shoulders» and «head». The pattern where «all paragraphs are observed», is a rear event on real charts. There are slight deviations often observed. For example «shoulders» very different in height, or the slight break of the supporting level and others.
Definitive attributes of the figure «Head and Shoulders»:
- three price maximums, the middle of which is the biggest;
- the minimum point is on circa same level;
- the price breaks the supporting level and heads in the downward direction;
- shaping the specific visual image on the chart.
The figure specifics
«Head and Shoulders» is a turnaround pattern, which means its appearing on the peak of ascending trend alarms of the «bulls» losing the power and the start of descending trend soon. If such a figure shaped on the chart the further quotation behavior may be forecasted with the high chances of accuracy.
After the price breaks the supporting level it usually goes down. At that it’s quite easy to forecast the point which it will reach in the near future. To measure the height of the turnaround pattern and mark as much down from the supporting line.
This nuance means a lot for Forex traders, where the profit depends on the distance in points passed by the price. But by trading on Binomo platform (go to the website) the trend intensity doesn’t matter, the proper forecast of the trend direction will be enough.
Signal for purchase the option «DOWN»
The entrepot hall be opened when the pattern is completely shaped – while the break of the supporting level. The optimal point for entering the market is the alarm candle stick closing below the level.
On the image above the moment of the option purchase is marked by yellow. As we can see, in the course of the following 7 candle sticks the price drop was observed. The correction force in points is equal to the pattern height.
Signal for purchase the option «UP»
Trading for a rise shall happen with the similar signal, but while the turnover of the descending trend. In this case the pattern «Head and Shoulders» is turned around. The purchase of the «UP» option shall follow the green ascending candle stick closed above the resistance level.
The example of pattern trading
The practical approach in training is the most effective thing. So we opened a transaction on Binomo platform by free signals specially for this article. The discriminating reader will notice, that the images shown below were already brought as an example above. But by the time of the creation of the screen shots the trading was running in online mode.
Well, after the turnaround pattern appeared and the supporting level got broken an option for 1 minute was purchased. The investment for $10, the expected profit $7.90.
The expiration term fails due – the option closes with profit. The price kept falling, but we already gained our benefit.
The pattern considered in the article works nearly error-free. If you see a similar figure on the chart, you can safely buy an option in direction of the expected pullback. The expiration terms shall be set in a way that the transaction would close in 4-8 candle sticks. The specific value shall be chosen based on the current volatility of the asset used.