The shoulder-head-shoulder pattern is a trend reversal chart formation that indicates a potential reversal from an uptrend to a downtrend. The pattern consists of three tops, with the center top (the head) being higher than the two side tops (the shoulders). This pattern is often considered one of the most reliable for identifying a trend reversal.
How to identify a shoulder-head-shoulder:
- First shoulder: the first high is reached in an uptrend and is followed by a price decline to a support level.
- Head: The central high is reached and is higher than the shoulders. It is followed by a drop in price to a support level similar to that of the first shoulder.
- Second shoulder: The third peak is reached at a level similar to the first shoulder, followed by a price decline below the support level.
Where to place stop losses and take profits:
Traders can place sell orders below the support level after the shoulder-head-shoulder pattern has been confirmed. Stop losses can be placed above the head level, while take profits can be placed at the next support level or at a key support level. In some cases, it may be better to exit the position in stages rather than selling all at once.
Basic money management rules:
It is important to follow some basic money management rules to effectively manage the risks associated with trading. Here are some rules to follow:
- Have a risk/reward ratio of at least 2:1 for each position taken in trading. This means that the potential gain should be twice as large as the potential loss.
- Risk no more than 1% of your capital on each position taken in trading. This limits potential losses and protects trading capital.
- Use a stop loss to limit potential losses and a take profit to set profit targets.
- Avoid taking too many positions at once and diversify the trading portfolio to limit risk.
By following these basic money management rules, traders can effectively manage the risks associated with trading and maximize their potential gains. It is important to follow these rules strictly, especially when identifying a shoulder-to-shoulder pattern, to minimize the risks associated with taking a position.
