Little tutorial guide on how to trade the Head and Shoulders (H&S) and Inverse Head and Shoulders (IH&S) patterns. This example in particular walks through the H&S variant only, but the exact same practices are used to trade IH&S. Note that I am using the replay feature to show what this trade would look like to enter live and how you would identify it in real-time.
Trend direction.
The first thing we need for H&S pattern is to have a respected uptrend (downtrend needed for IH&S). In the chart below, notice that we have only identified the trending direction and charted the market structure that is hitting the lows of the price action.
Break of market structure.
In order to even consider a H&S or IH&S, we need the market structure trendline to break. The reason for this is because I only trade these patterns when they form while crossing the market structure trendline, I do this because it increases the success of these trades tremendously. The following chart is a bit cluttered as I provided a couple examples of what we do and do not want regarding the break in market structure.
Monitor for additional market structure.
This is true for any trade, not just H&S and IH&S. But not that we have a break of market structure we need to keep an eye out for any potential changes in market direction. The chart below is a snapshot of a point that I would start to identify this structure. The chart below is showing a lot of sell pressure on a retest of the market structure.
Add chart patterns.
Its important to be prepared when trading, so adding the potential H&S patterns to the chart is my preference as soon as I can see something forming. This also makes it very easy to flip through my watchlist later and quickly be caught up on what I was looking at while charting. You’ll notice the lower support line of the H&S isn’t perfectly horizontal, that is absolutely fine and totally normal. It’s very uncommon for H&S patterns to be perfectly balanced or symmetrical. From this point we just monitor the chart until it gives us more price action to initiate a trade.
Determine trade entry and targets.
So now we have the confirmed break of the H&S pattern. The next step is to decide how/when to enter the trade. Sometimes it is ok to simply enter on this confirmed breakout rather than waiting for a retest. However, my personal preference is shown in this chart below. I typically go down to a small timeframe chart (5-15min) and enter on a small retracement. A retest of the white dotted line would be the best entry but that often doesn’t happen. My strategy is to generally enter on the 0.5 fib retracement of the breakout (this fib retracement is left on the chart for demonstration purposes, although I always remove this before sharing charts). And regarding targets, this depends on the trade itself whether you choose to target the next support level or use the -0.272 or -0.618 fib for targets. The example shown has the target placed just above the 0.618 fib as this is a support level of interest for me.
Entry target hit.
The trade would’ve triggered here and we are now entered. Simply time to let the trade play out and see how it goes.
Exit target hit.
The exit has been hit and the trade has been a success. You can decide to take all profits at this point or partial profits and let the rest ride. All of this depends on BTC conditions for me personally. But at this point you made a successful H&S trade, congrats!
For some final thought, the IH&S is exactly the same, just using a downtrend and identifying the pattern the other direction. If you ever struggle identifying one direction more than another, you can always invert the scale on your charts (keyboard shortcut CTRL+I). The biggest parts of these patterns that many people fail to pay attention to is that they must occur at the end of uptrends or downtrends and the pattern must form over the break of the trend structure. Many people try to find H&S patterns without those rules and you won’t have nearly as high of a success rate that way.
Little tutorial guide on how to trade the Head and Shoulders (H&S) and Inverse Head and Shoulders (IH&S) patterns. This example in particular walks through the H&S variant only, but the exact same practices are used to trade IH&S. Note that I am using the replay feature to show what this trade would look like to enter live and how you would identify it in real-time.
The first thing we need for H&S pattern is to have a respected uptrend (downtrend needed for IH&S). In the chart below, notice that we have only identified the trending direction and charted the market structure that is hitting the lows of the price action.
In order to even consider a H&S or IH&S, we need the market structure trendline to break. The reason for this is because I only trade these patterns when they form while crossing the market structure trendline, I do this because it increases the success of these trades tremendously. The following chart is a bit cluttered as I provided a couple examples of what we do and do not want regarding the break in market structure.
This is true for any trade, not just H&S and IH&S. But not that we have a break of market structure we need to keep an eye out for any potential changes in market direction. The chart below is a snapshot of a point that I would start to identify this structure. The chart below is showing a lot of sell pressure on a retest of the market structure.
Its important to be prepared when trading, so adding the potential H&S patterns to the chart is my preference as soon as I can see something forming. This also makes it very easy to flip through my watchlist later and quickly be caught up on what I was looking at while charting. You’ll notice the lower support line of the H&S isn’t perfectly horizontal, that is absolutely fine and totally normal. It’s very uncommon for H&S patterns to be perfectly balanced or symmetrical. From this point we just monitor the chart until it gives us more price action to initiate a trade.
So now we have the confirmed break of the H&S pattern. The next step is to decide how/when to enter the trade. Sometimes it is ok to simply enter on this confirmed breakout rather than waiting for a retest. However, my personal preference is shown in this chart below. I typically go down to a small timeframe chart (5-15min) and enter on a small retracement. A retest of the white dotted line would be the best entry but that often doesn’t happen. My strategy is to generally enter on the 0.5 fib retracement of the breakout (this fib retracement is left on the chart for demonstration purposes, although I always remove this before sharing charts). And regarding targets, this depends on the trade itself whether you choose to target the next support level or use the -0.272 or -0.618 fib for targets. The example shown has the target placed just above the 0.618 fib as this is a support level of interest for me.
The trade would’ve triggered here and we are now entered. Simply time to let the trade play out and see how it goes.
The exit has been hit and the trade has been a success. You can decide to take all profits at this point or partial profits and let the rest ride. All of this depends on BTC conditions for me personally. But at this point you made a successful H&S trade, congrats!
For some final thought, the IH&S is exactly the same, just using a downtrend and identifying the pattern the other direction. If you ever struggle identifying one direction more than another, you can always invert the scale on your charts (keyboard shortcut CTRL+I). The biggest parts of these patterns that many people fail to pay attention to is that they must occur at the end of uptrends or downtrends and the pattern must form over the break of the trend structure. Many people try to find H&S patterns without those rules and you won’t have nearly as high of a success rate that way.
Happy Trading