Is Head and Shoulders Pattern Bullish or Bearish?

The Head and Shoulders pattern is one of the most well-known and widely recognized chart patterns in technical analysis, applicable to various financial markets, including the forex market. It is a reversal pattern that typically forms after an uptrend and signals a potential trend reversal from bullish to bearish. Let’s break down the components and characteristics of the Head and Shoulders pattern in forex trading:

1. Formation:
The Head and Shoulders pattern consists of three peaks, with the middle peak (the head) being higher than the other two peaks (the shoulders). The pattern resembles the shape of a human head and shoulders, hence its name.

2. Components:

• Left Shoulder: This is the first peak formed during an uptrend. It is followed by a temporary pullback or consolidation.
• Head: The highest peak in the pattern, formed after the left shoulder. The price rallies to a new high, often surpassing the previous peak, before retracing back to the neckline.
• Right Shoulder: The third peak, usually lower than the head and similar in height to the left shoulder. It is formed when the price attempts to rally again but fails to surpass the head’s high.

3. Neckline:
The neckline is a trendline drawn connecting the lows of the left shoulder, head, and right shoulder. It acts as a support level during the formation of the pattern. Once the neckline is breached to the downside, it confirms the completion of the pattern and signals a potential trend reversal.

4. Volume:
Volume analysis is essential when identifying the Head and Shoulders pattern. Generally, volume tends to decrease as the pattern forms, indicating a lack of buying interest. However, an increase in volume upon the breakout below the neckline confirms the pattern’s validity and strengthens the reversal signal.

5. Target:
The price target for the Head and Shoulders pattern is typically measured by projecting the distance from the head to the neckline downwards from the neckline’s breakout point. This projected distance is often considered as the potential price decline after the pattern completes.

Trading the Head and Shoulders Pattern:
Here’s a step-by-step approach to trading the Head and Shoulders pattern in forex:

• Identification: Identify the formation of the left shoulder, head, and right shoulder along with the neckline.
• Confirmation: Wait for the price to break below the neckline, accompanied by increased volume, to confirm the pattern’s completion.
• Entry: Enter a short position once the price breaks below the neckline.
• Stop Loss: Place a stop-loss order above the right shoulder to mitigate potential losses in case of a false breakout.
• Take Profit: Set a profit target based on the pattern’s projected distance or using other technical analysis tools and support levels.

The Head and Shoulders pattern is a powerful tool for identifying potential trend reversals in the forex market. Traders often use this pattern in conjunction with other technical indicators and analysis methods to increase the probability of successful trades. However, like any technical pattern, it is essential to wait for confirmation before entering a trade and to manage risk effectively.

So if Head and Shoulders pattern formation is confirmed then you should enter SHORT position which is in this case it is BEARISH.