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Trading the Jam way

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Juno Beach
 
Futures Experience: Advanced
Platform: Ninja and TS
Broker/Data: Optimus Futures / Matt
Favorite Futures: multiple
 
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Posts: 135 since Sep 2009
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Head and Shoulders patterns

The Head and Shoulders Pattern is one of the most highly noted patterns traders look at. Because this pattern is so recognized it stands to reason that it will have an impact of some king when it forms. Remember, markets tend to follow crowd behavior. Head and Shoulders Patterns form at market tops and bottoms, but can also form during trends that are already in place. The Head and Shoulders Pattern has a reputation for being one of the most reliable patterns.

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What makes a head and shoulders pattern unique is the psychology that takes place in traders in order for this pattern to form correctly. You start out with a strong market in a direction with an initial top that forms, followed by a retracement and then another push higher then the previous top. At this point the only information you have is that we are in an up market with higher higher and higher low pivots (see Gann Pivot Analysis). However, when the next leg up begins it is usually on less volume and as it continues, fails to take out the previous top forming our first bear rally and right shoulder.

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The violation of the neckline as shown in the chart below, is in itself a signal that the market has reversed. This is a good area to look for an entry.

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Reversal head and shoulders patterns that form at the bottom will be reversed from the top patterns giving you the appearance of someone standing on their head.

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Last edited by JamTheTrader; January 17th, 2012 at 06:36 AM.
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