Everyone knows that trading against the major trend is more like a suicide mission. But do you really think the pro trader never execute trades against the major trend? If you gain enough experience about this market, you can easily trade the major trend reversal and ride the newly formed trend from the very beginning. Though there are many ways to trade the major reversal today we will highlight some of the key factors you must learn to trade the head and shoulder pattern.
There are many reversals pattern in the Forex market but the pro traders prefer to trade the head and shoulder due to its extreme level of reliability. However, such a trading strategy is only for the intermediate traders since it requires execution of the trades against the major trend.
What is head and shoulder pattern?
The investors in the Forex market might not have a clear idea about the head and shoulder pattern. This pattern is nothing but a bearish reversal signal. Basically, the pattern is formed based on three major points near the end of an uptrend. The pattern is more like the head and shoulder of a human being for this very reason, people called it head and shoulder pattern. Once the price of certain assets breaks the neckline of the pattern, the retail traders execute a short trade hoping to make a decent profit.
Understanding the neckline
Understanding the neckline of this pattern is fairly easy. In the head and shoulder pattern, the price tries to break higher for three consecutive times from the same support level. This support level is known as the neckline. Most of the aggressive traders execute short orders after the daily closing of the price below the neckline. On the other hand, the pro traders wait for a minor bullish retracement towards the neckline to execute short orders.
Use of price action confirmation signal
The smart traders in the options trading industry use the price action confirmation signal to reduce the risk exposure in head and shoulder pattern trading strategy. If you trade the pattern without any confirmation signal, chances are very high you will have to use a wide stop loss. But the professional traders always love to trade the market with tight stops since it greatly reduces the risk exposure in trading. Think of the pro traders in the United Kingdom. They never trade the bearish reversal signal unless they can find a reliable bearish price action confirmation signal.
Analysing the news factors
Most of the time, the price manages to break the neckline on the event of high impact news. The new traders might not have a clear idea about the fundamental analysis but learning this thing is not all hard. Use the demo account and see how the market reacts to the fundamental data. Never try to execute any trade without learning to trade the market in the demo account. Use the demo account to trade the major news so that you understand how this market reacts to different news. Once you understand the impact of major news, you can easily trade the head and shoulder pattern.
Managing the risk factors
Learning to manage the risk factors in the head and shoulder pattern trading strategy is very hard. But if you incorporate a price action trading strategy, it won’t take much time to develop your skills. Being a rookie trader try to master price action trading system since it will help to find great trades. In fact, you can trade the major reversal chart patterns with an extreme level of accuracy. When you execute the trade in head and shoulder chart pattern trading strategy, make sure you are not taking more than a 1% risk. Once you truly understand the importance of risk management policy, you will never have a tough time with your trading profession. So, think smart to become a better trader.