Forex trading is a very popular and lucrative business nowadays. More people were able to join it within the last years and make good profits in the foreign exchange market. But, even though Forex market has a huge profit potential, it also involves a lot of risk of losing money. That is why only a small percent of all traders become successful in Forex market.
Forex trading involves a lot of technical analysis you have to learn, if you want to get more profitable trades. One of the most recognized and popular technical patterns among the new traders is head and shoulders. Many traders can see this pattern even if it is not shown on the chart.
The formation of head and shoulders pattern includes two shoulders and a head between them. There are also two kinds of this technical pattern. The first type indicates when the trend reverses to the downside. This shape has the head with the high rate between the shoulders. The second pattern type is when the trend reverses to the upside. This time the head has the low price between the shoulders.
Forex market is very volatile so the waves’ alteration occurs constantly. So, almost any sequence of contradictory market movements can be viewed as a head and shoulder pattern. This is a big mistake, which is also intensified by the stress involved in trading. If Forex trader is inexperienced, he might have an open position after getting a signal from a wrong pattern and then his emotions will make him look for this trade plan confirmation. It is not unusual, when trading Forex signals under a lot of stress.
This technical analysis pattern is the most difficult to trade, because it is the most tricky to recognize before trader can take an advantage of it. There are many sources, online and offline, which tell us about head and shoulders formation. But, when you have to deal with it in practice, it looks a little different. According to books, shoulders have to be on the same price level and the neckline has to be on a parallel line.
But when you look at the chart, it doesn’t always look as clear. It usually takes a lot of time for this formation to be noticed and before it can qualify as a potential head and shoulders. To make a profitable trade based on such predictions, we need a lot more confirmations to make the pattern valid. If it is not completely formed, it could be a signal of a totally different formation. The neckline doesn’t always have to be a straight line and it can be an upper border line or a simple trend line. Until we see that the second shoulder is fully formed, we cannot place trades based on such pattern.
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Tags: currency trading, Forex
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