The certain figures which are the so-called chart patterns or models can appear in the price chart from a time to time. These patterns are the forerunners of formation of the certain trends in a market. Part of these patterns can show the continuation of the current market’s trend (for example, if the price of the certain tool has grown, such pattern indicates the uncertainty period, which will be followed by the further ascending movement). As for other similar patterns, they belong to the reversal patterns and warn traders that the current trend is likely to end soon.
Head and shoulders: strategy of trading
The head and shoulders strategy is based on the cognominal reversal pattern which warns a trader that there will be changes in the market soon (direction of the main market’s movement will change to the opposite).
If you look at the illustration above attentively, you will understand the origin of the chart’s pattern name. It consists of the head, which is the highest point, the extreme point, as well as the two shoulders, which are formed on the left and on the right of the head. The formation of the left shoulder is taking place when the regular extreme point of the ascending trend arises. After this, the tool’s price goes down (the neck which touches the tool’s price after the bounce off from the first maximum is delineated in the picture intentionally). Then, the ascending trend continues and reaches the new maximum (head’s formation). After this, the price goes to the neck’s line again and touches it. In this situation we can already say that the ascending trend’s rule of formation is broken. This is for the reason that during the updating maximums the minimums don’t raise, but stay at the same level. Finally, the formation of the right shoulder occurs, and it occurs according to the same principle as the formation of the left one. This is how the work within the Head and shoulders strategy begins.
Head and shoulders pattern: usage
Signal for the Put option’s purchase appears only when the price overcomes the neck line (which acts as the support level). But some traders recommend waiting another one touch of the neck’s line (which turned to the resistance level after the top-down breakthrough). Usually, when this pattern is being formed, the price tends to return to the neck’s line, which has acted as a pretty strong support before the breakthrough. The Put option can be also bought after this touch.
As we can see from all mentioned above, usage of the Head and shoulders binary options’ strategy can bring a profit to a trader. But there is an important point here. The most important is to determine this pattern’s formation on the chart. This pattern may look not that perfect, as it is shown in the exemplary picture. Its shoulders may not be situated at the same level. But in order to make this Head and shoulders binary options’ strategy work, it is important to make sure that the main conditions of the pattern’s formation on a chart are abided.
It is also needed to note that the Head and shoulders pattern may precede turning points for both ascending and descending trends. In this case, the goal of the Head and shoulders binary options’ strategy would be the earning of profit from the Call option purchase. As for the pattern itself, it would be the mirroring of what is shown in the picture. When the line of resistance is broken out (neck’s line will initially be the resistance line in the mirroring), it is needed to buy the Call option. The best time to apply this strategy is at the end of the week or the month. In other words, it has to be applied with mid-term and long-term trends.
We sincerely hope that this strategy will help you to trade profitable in the market. In order to improve results, we recommend testing the additional binary options strategies. It will help you to develop your own trading systems.