The Head & Shoulders Pattern Revised For Smart Entries

The Head & Shoulders Pattern Revised For Smart Entries

Everyone knows the H&S pattern, as it is the most talked about even on financial TV when so-called “experts” analyze the S&P 500 for you to make (lose) money. The classic approach to this pattern is to enter it at the break of the neckline, as seen here:

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On this entry method, the stop usually goes above the right shoulder, usually requiring big risks and reducing our average RRR, while the break of the neckline often comes with a lot of confusion and fake-outs.

What if you could enter this pattern with the same winrate, but with a much higher RRR, and a much higher chance of getting your stop to breakeven before price returns on you because of a potential fake-out? I would say, I’d take that every day.

So the trick is to enter not at the break of the neckline, but at the inception of the right shoulder. And we do this by using multi-timeframe analysis. We look for H&S patterns on the higher timeframe, and then time our entry at the right shoulder on the lower timeframe. This would look like this:

Screen_Shot_2016-07-29_at_2_37_53_AM

So we look for the left shoulder, the head, and then when price makes a lower low and comes back to retest the high of the left shoulder, we go down to our lower timeframe and look for price action patterns to get in (1-2-3’s, Turtle Soups, Double Tops/Bottoms, and so on) – when price then goes down to the neckline we can set our trade to break-even and see if it breaks. Doing this, we can achieve a higher RRR (stop still goes above the right shoulder) and we can keep around the same winrate, as I found out testing hundreds of these patterns.

Additional confluence can be derived from a concept called inner trendlines, namely, if the right shoulder retests an inner trendline, the trade is an absolute killer. Take a look:

Screen_Shot_2016-07-29_at_2_45_04_AM

Targets can be derived through classical means (S/R levels, trailing stops) or through measuring extensions using our good old Fibonacci tool.

Screen_Shot_2016-07-29_at_2_53_41_AM

Simply measure from the head to the lowest/highest point of the pattern and aim for the 127, 161 and 200% extensions, depending on price action and confluence with S&R levels and trendlines.

Trading the H&S this way will grant you a lot more pips and ticks than doing it the traditional way, and your hitrate will stay about the same.

Give this method a try and reap the rewards. These H&S patterns happen all day long in every market and you just have to recognize them to take some nice trades. Important is that you look for them on the higher timeframes and then enter on the lower ones. Enjoy!

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