Head & Shoulders

The EURUSD (1-Hour Chart) has now established what appears to be a classic "Head and Shoulders" pattern over the course of the past few weeks. This pattern is essentially a 'triple top' pattern, where the center top (Head) stands higher than the first or third tops (Shoulders). The rational occurs as the result that the market was not able to revisit recent high prices established during the center top, and therefore is inherently a sign of an imminent reversal to come. Typically, to complete the head and shoulders pattern, we must wait for the market to break below the lows established during this triple top patter; (neckline). However in regards to placing the actual trade, it is in our best interest to sell-short the market as it tests and fails to break above the highs of the 2nd shoulder, while placing protective stops above the highs of the shoulders and perhaps the highs of the center top (head). By doing so, this trade can provide us with a favorable risk to reward scenario if the market does in fact breakdown below our horizontal support line to new low's.

Adam Rosen, FX PowerCourse Instructor
FXCM