The chart pattern trading strategy is designed for professional traders. Those who have mastered chart pattern trading technique can even trade the major reversal. But learning to deal with the chart pattern is not so easy because there are many kinds of pattern. Learning about the chart pattern is not enough. You have to develop some abilities by which you can deal with the chart pattern. Since the pattern trading technique is based on a breakout strategy, you have to be extremely careful about the trade execution process. Unless you can follow the guidelines, you might have to lose a big portion of your capital.
In this article, we are going to discuss the head and shoulder chart pattern trading strategy. This pattern is usually spotted in the last part of an uptrend. In fact, some experienced traders often consider it as the most powerful bearish reversal trading strategy.
Formation of the pattern
The pattern is formed based on three peaks. The first peak is known as the left shoulder and the third peak is known as the right shoulder. The highest peak which is usually found in the middle is known as the head of the pattern. If you closely look at this chart, you will feel like the pattern represents the head and shoulder of the human being. For this reason, it is named as head and shoulder pattern.
Critical support or the neckline
The neckline acts as the critical support level from which the price starts to form the three major peaks for this pattern. The traders usually execute the short orders as the price breaks the neckline. Before you start using this pattern, join the Aussie Forex online community and learn about the importance of a professional trading environment. If you trade with a faulty trading platform, you might have to deal with the false breakout. Accurate price feed is very crucial to your trading success.
Execution of the short trade
There are two major ways by which you can execute the short trades after the break of the neckline. The aggressive traders usually enter shorts as soon as the price break the neckline. On the other hand, the professional price action traders wait for the minor bullish retracement in the price so that they can place the short with a tight stop. But for that, you have to learn to deal with the reliable candlestick pattern. Though it’s a very powerful reversal trading strategy, you must maintain a low-risk profile.
The major breakout occurs in the event of a high impact news data release. Those who are smart analyze the fundamental data so that they can place the trade based on technical and fundamental analysis. Though technical analysis is enough to secure your profit, you should still rely on the news data since the process greatly improves your win rate. Learning about the fundamental details is not a tough task. If you analyze the high impact news, you will realize how the market reacts to different forms of data.
Managing the risk
Being a user of the reversal trading strategy, you have to learn to lower the risk of trading. First of all, you have to use a low leverage account so that you don’t have the extreme buying power. Secondly, you should not take more than 2% risk even though you are confident with the trade setup. Always be ready to accept the unexpected in the trading business. Once you understand the importance of a risk management policy, you won’t take high risks in trading.
You might be a brave person in real life but there is no reason to show courage by going against the basic rules of investment. Always place the orders by reducing the lot size so that you can endure the losses in each trade.