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Support and Resistance Strategies
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Entering the Head &
Entering the Head & Shoulders Trade
The first entry for the formation is to sell when a price trades below the neckline, which in this case will also be the support and resistance zone. To be more specific; sell on the open of the candle following the candle that closed below the neckline (this is also the S/R line) of the formation.
When trading the Head and Shoulders formation off of a support/resistance zone, the support/resistance zone will always be the neckline.
In this example we see that the most recent bar has closed below the support/resistance zone.
Below is another way to enter the trade:
Instead of selling on the first break, you may also decide to wait for the market to break the neckline with more conviction. In this case you should wait for the price to break the neckline a second time before entering your trade. Once again you will enter on the open of the candle that follows the second candle that closes below the neckline. In addition to this you should place a stop loss a little bit above the top of the last shoulder formation.
This is not the only point that we would consider a sell on the USD/CHF in this example. We could also wait for the pair to break through the neckline and retrace back up to the neckline. Here we could enter the trade.
Although this will not always occur, there is a good chance that when the price attempts to re-touch the neckline it will bounce off. This allows us to enter the forex trade at the neckline after the price has already crossed over.
Please keep in mind that head and shoulders formations are not always flat. They can often be at a slope. You can still find valid entry signals in conjunction to support/resistance lines even with sloped head and shoulder formations. However, many traders do prefer to use the traditional strategy of a flat line Head and Shoulders formation.