The Head and Shoulders reversal pattern

Overnight we have seen some strong dollar moves. Price action looked to be overextended and we started to see some head and shoulders reversal patterns forming on most pairs. The one that I liked the look of the most this morning was USDJPY.

USDJPY was trending higher on the 5 min chart, but when the price action failed to set a higher high this provided the right shoulder for the head and shoulders pattern. A break of the neck line would be my signal for entry, which would also be the break of the trend line and the big number 90.00. Also if you check out the MACD there was divergence giving added confirmation for the trade. For targeting this pattern we measure from the head down to the neck line and in this example that gave a target of 25 points. With the daily pivot level at 89.73 this also provided conformation of a suitable target level.

Price action broke the neck line, the trend line and the big number and closed below these levels so the trade was entered and as you can see from the chart carried on down to the target level where the trade was closed.

At the same time the GBPUSD 7am trade triggered, there was a line of support on the price action which was at the support level 2 of the daily pivots, this level broke just after 7am and the trade was entered and ran down to the 20 point target.

So I was trading GBP weakness and JPY strength, so would expect to see GBPJPY dropping and yes it was. The line of support was broken but this time waiting for the candle to close before entry did not help, as the price closed over 20 points below the break level this would add to much risk in points to the trade so the trade was left.

Always remember your trading rules and do not go chasing the trades. If you missed one don’t worry as there will be another one along some time.