A pretty strong Head and Shoulder Pattern is being formed on EUR/USD Weekly Chart. Head and Shoulder pattern when formed at the end of an uptrend is a pretty strong signal for a trend reversal. Take a look at the following chart!
As you can see in the above screenshot, there is the left shoulder, then there is the head and finally there is a right shoulder. Ideally the neckline should be sloping down but even if it is sloping up doesn’t disqualify this as a Head and Shoulder Pattern. This pattern appears when an uptrend is about to reverse itself while the Inverted Head and Shoulder Pattern appears at the end of a long downtrend and is considered to be a strong signal for the start of an uptrend. If you don’t know anything about Head and Shoulder Pattern, you can read this BabyPips article on Head and Shoulder Pattern.
How To Trade Head and Shoulder Pattern?
Head and Shoulder Pattern is considered to be one of the most reliable trend reversal pattern. Professional traders love to trade this pattern. When the neckline is broken we will enter into a short trade. Since this pattern is forming on the weekly chart, it means a very big down move in the market is in the making. How do you calculate the size of that move? The size of this move is calculated by the distance between the top of the head to the neckline which is in this case comes out to be around 1000 pips. So this move can bring in from 800-1000 pips. When you enter on a weekly chart a move can last a few months. So it is expected that EUR/USD price will drop to around 1.8000 in the next 2-3 month.
You can use the daily chart to make the entry and exit decisions. The best strategy to trade this Head and Shoulder Pattern is to use the daily chart and use pyramiding. Pyramiding is a strategy that can help in making explosive profits. When one position goes in profit, you move the stop loss to breakeven and open another position at a retracement. So you can practically control a large position with a small risk by using the float of the previous position. I plan to trade this head and shoulder pattern and will keep you posted as I open new positions. Right now I am waiting for the neckline break so that I can open my first position.