Video Transcript:

Hello, traders. Welcome to the third module of the advanced technical analysis course: chart patterns. And in this lesson, we’re going to teach you how to trade the Head and Shoulders Pattern. Remember, the Head and Shoulders is one of the most powerful reversal patterns you can find on your charts. And, it takes a while for a Head and Shoulders to complete but when it is complete and it breaks out, you will have or you will be in a very high probability trade. So, let’s go through it. So, let’s go through it.

Head and Shoulders interest, stop losses, and targets. Let’s start with the entries of the Head and Shoulders. Of course, you must wait the break out of the neck line for you to be able to trade it. And Head and Shoulders is the most powerful reversal pattern, we already said that. And, in an uptrend after a retest of resistance price fakes out just to retest it again, creating the pattern. Remember, the fake out is when price actually breaks though the resistance area but comes back down the resistance area, okay? That is called a fake out, or a fake break out, and this is what we’re looking for. And, when we are in a Head and Shoulders, a test of resistance, then a fake out of that resistance, and a test again of the resistance, creating the second shoulder.

And, the same is true in a down trend as support, and this is called an inverted Head and Shoulders. An inverted Head and Shoulders will test a support zone then fake out of the support zone. Then, we test it back to create the second shoulder of the pattern. And, here’s an example of what a Head and Shoulders looks like. As you can see here, we are in an uptrend and we tested this area of resistance just to fake out of it, a big pull back and retest of the area. Once we break with the neck line, we have a single to go short on this instrument. And, the neckline is always the trend line that joins the two lows of the pull back in a Head and Shoulders or the two highs of the pull back in an inverted Head and Shoulders.

For the stop loss levels, the stop losses should always be above the pattern’s head. And, this is simple because let’s imagine that we are here, and we are waiting for the completion of the pattern and the breakout of the neck line. And, as in this case, the breaks below… our price breaks below the neck line and we go short. And, if we pull up too tight of a stop, meaning that if we put a stop right here, right above the neck line, we might get stopped out. If when price comes down and comes back up to retest, this trend line as resistance in and then, coming going down and reaching our targets.

So, if you take too much of a tight stop loss, you take the risk to get stopped out, and, or to get stopped out on a winning trade that would have reach your target. So, and remember that stop loss levels are levels or price levels that completely invalidate your trade idea. So, if we go short here and price retests this high of, or this shoulder, we are still good on our short idea. But if we break with this high right here, it will mean that we will be making higher highs and our short idea is no longer valid. So, when we have a break out and an entry, the stop loss level should be above the patterns head. And, in a very single or an inverted Head and Shoulders, the stop loss should go below the pattern’s head.