High Probability Head & Shoulders Patterns - [Trading Tip]
Updated: Apr 10, 2020
The Head & Shoulders pattern is one of the most common and well-known patterns in trading. However, some patterns are higher probability than others, and understanding the price action dynamics behind this pattern is key.
The H&S pattern is a reversal pattern and it structure signals the shift in momentum. The reversal of power between the bulls and bears. Simply having three points of reference (left shoulder, head, right shoulder) is not enough to point to this shift in momentum.
For a high probability H/S reversal pattern the pattern ideally has to set-up as follows:
Corrective Left Shoulder - Momentum is still with the underlying trend, and the market is just correcting for the trend to continue.
Reversal Impulse after Head - This is the first signal that there could be a shift in underlying market momentum. (If this head forms with a bit of a consolidation, this could indicate some market accumulation/distribution and adds to the probability of the pattern.)
Corrective Right Shoulder - Here you want to look for corrective price action, indicating the market will continue with its reverse in momentum after the impulsive move from the head.
We will look at a few examples in the market to explain this process.
EXAMPLE 1: AUDUSD 4H - 10 Oct 2019
We have the left shoulder forming in a corrective pattern. Pointing in a continuation in the underlying downtrend.
The market creates a bullish impulse, against the underlying trend. What is also important to note is that the head formed a small consolidation, adding to the probability of a potential reversal forming.
The Right Shoulder is forming in a corrective manner. (This pattern is called a ZigZag) Back into the consolidation level of the head. This now becomes a high probability head and shoulders pattern.
As you can see the reversal played out quite well. Now how you execute this pattern is a matter of discussion for a future post. But whether you look for entries during the correction, during the breakout or the retest after the breakout, waiting for the pattern to form in a high probability structure will greatly increase your odds of it being profitable.
EXAMPLE 2: CADCHF 4H - 12 Mar 2019
Here we have a clean left shoulder that formed. However, the shoulder did not form as a corrective pattern. Now, this isn't as important as having the left shoulder form in a correction or corrective pattern, but still, something to note and consider when backtesting this pattern.
We have a clear head forming here with the impulse against the underlying trend. There was even a small consolidation. (Perhaps more visible on the lower timeframes.)
Clean left shoulder formed. We even have the break and retest of the neckline. Pretty textbook right? The only problem is we didn't get a clear corrective pattern on the right shoulder. (These patterns can include, zigzags, triangles, flags, expanding or regular flats for example)
Because we didn't have the clear correction, pointing to a potential shift in momentum, we don't consider this to be a high-probability reversal pattern and you are better of being patient, waiting for a better opportunity :)
I will leave you with a couple more examples and a video extract from our Advanced Price Action Training Course covering this very topic.
EXAMPLE 3: USDJPY 30Min - 02 Apr 2020
EXAMPLE 4: EURCAD 1H - 05 Feb 2020
Video Extract from The Advanced Price Action Trading Course