This article looks at the use of the head and shoulder pattern to get forex signals.
When you trade forex you will need to use forex signals to determine when you should be trading. The forex signals that you use can be found through the analysis of the market. One way to analyse the market is through the use of chart patterns. One of the patterns that you should know about and use when you trade is the head and shoulder pattern. It is important that you know how this pattern is formed, the type of pattern it is and how you can get forex signals from this.
The Type of Pattern
When you look at chart patterns you will find that there are two different types. These are the reversal patterns and the continuation patterns. The head and shoulders pattern is a reversal pattern that signals a turn in the price movement that you have seen on the market.
Identifying the Head and Shoulders Pattern
In order to get forex signals from the pattern you need to be able to identify this. There are four parts to the pattern that you need to know about. These are the two shoulders, the head and the neckline. All of these parts are important as they determine when and how you are going to be trading on the pattern.
The pattern forms with the first shoulder which forms a peak on the charts in the direction of the market movement. There will be a retracement after this peak to form the first shoulder. The next part of the pattern is the head which is a peak in the original direction of the market that is higher than the first shoulder. This will also be followed by a retracement. The second shoulder will be the third peak of the pattern which should be a similar height to the first peak. This will be followed by the reversal of the price action.
The neckline of the pattern will be drawn across the low points of the retracements in the pattern. The pattern will only be formed fully when the price action breaks through the neckline. If these is no break through then you are not seeing the fill formation of the pattern. This can mean a number of things from the pattern not being there to inconsistencies in the analysis of the pattern.
The Forex Signals You Get
The forex signals you get from the pattern will only come when the price breaks through the neckline. When this happens the price movement has reversed and you will be able to trade accordingly. It is best to wait for this break before you trade.
Of course, you have to consider that there are times when there is a throwback with the pattern. When this happens, the price action will move in the original direction after the neckline has been broken. When you see this the market is testing the strength of the new movement. This will generally return to the new movement which has been indicated by the pattern. However, you need to be aware that this could happen and to not panic if this does occur.