Head and Shoulders (H&S) patterns, as well as crown formations, are easy to spot reversal patterns. The best part about these patterns is that they take a bit of time to form; they do not come and go in “a blink of the eye.” You can watch them form and plan your entry well in advance.
What is the difference between Crowns and H&S patterns? Nothing really. It just a difference between a bounce (H&S), or break (Crown) of the neckline. Beyond that, there isn’t much of a difference.
As you will see, using trend or channel lines can help you spot these reversal patterns early, as the first break of the trend will signal a possible reversal of trend. The completions of either of these reversal patterns confirm the reversal, and help you identify entry points. In fact, they may also help you better target your exit points!
If you execute a proper entry on a H&S, or crown formation you may need to fasten your seatbelt, as you could be in for some fantastic pips as a reward for your minimal risk. Proper entry along with proper risk management, are the most important factors of a successful H&S/crown trade setup.
There are two so-called “tricks of the trade” regarding use of H&S in your trading business:
1. Once the second shoulder or crown is formed, you have a new trend in place. You can identify a good limit order by connecting the top of the center head/crown to the top of the right shoulder/crown. Then draw a parallel line from the nearest swing or neck line. This new parallel line is the target.
2. Measure the distance from the top of the center head/crown to the neck line. How many pips is it? This is how far price will break before it may retrace. The bigger the pattern, the bigger the break. If the head or center grown is 38 pips, then your limit would be 38 pips. Either take profit or move your stop-loss to protect profit.
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