Chart pattern - Head & Shoulders Bottom

The Head and Shoulders Bottom marks a "reversal" pattern in a downtrend market and is popular among currency traders.

The pattern consists of 2 Shoulders, 1 Head and the Neckline (resistance):

1) The first point - the left shoulder - occurs as the price of the currency pair in a falling market hits a low and then rise back to the neckline.
2) The second point - the head - happens when prices fall to an even lower low and then rise back again to the neckline.
3) The third point - the right shoulder - occurs when prices fall again but don't hit the low of the head.
4) A key element of the pattern is the neckline and can be horizontal, slope up or slope down and is formed by drawing a line connecting two high price points of the formation.

What does a Head & Shoulders Bottom reversal pattern look like?

The pattern is complete when resistance provided by the neckline is "broken." This occurs when the price of the currency pair, rising from the low point of the right shoulder, moves ABOVE the neckline.

Currency analysts will often say that the Head & Shoulders bottom pattern is not confirmed until the currency price closes above the resistance neckline - it is not enough for it to trade above the resistance neckline.

Please note: The Head & Shoulders Bottom looks similar to a Head & Shoulders Top but reverse.

How to trade this pattern?

Go long when the currency price CLOSES above the neckline and put a stop-loss few pips below the last bottom (right shoulder).

Use a risk reward ratio 1.5 or better to calculate your profit target.(if you risk 50 pips, your target should be at least 75 pips).

Chart example

EUR/USD Daily Chart Head & Shoulders Top reversal pattern

Please note that the Head and Shoulders Bottom formation does not need to be perfectly symmetrical.