Head and Shoulders Strategy: pros and cons, application features
Strategy “Head and Shoulders” is widely used to identify the future direction of the asset price movement.
It shows itself excellently both with the uptrend and with the downtrend. The essence of this strategy is to find a definite figure in the asset chart which outline suggests the head and shoulders.
The first important information for us is that usually a pattern Head and Shoulders is reversal. The formation consists of a pointed connection with the main trend. Then the old trend is picked up, and again an acute angle. And then again the movement in the trend direction takes place. Finally, there is the countertrend movement.
The far point of the third sudden movement is a latter objective, which the previous trend in the formation is capable of. Then the gradual development of a new trend in the opposite direction from the third small reversal starts.
The terminology is usually studied on the upper heads and shoulders. For example, the first level of curve and the third one are commonly referred to as the left shoulder. The second one, which is slightly above, forms the head. And the third and final level of curve has the equal height with the left shoulder. It is called the right shoulder, the final pattern. Such names have emerged from the anatomical similarities with a human head and shoulders.
Lower Head and Shoulders is called a reversible upper formation. Since this is the same figure (just inverted), its similarity with the human figure becomes conditional. Lower Head and Shoulders by the configuration is suggestive of a necklace, so sometimes it is referred to as Lower Pendant. In addition, this is a more logical name for such reversal figure.
The main disadvantage of this strategy is that the formation of a figure requires fairly long time, so that “catching” lots of signals to enter a transaction is impossible.
However, as in any situation, this shortcoming has the reverse side – one of the reasons why traders are so fond of the strategy “Head and Shoulders” is its reliability. Since the formation of this price pattern takes time, we can filter the market noise and spurious vibrations.
How to determine that a pattern “Head and Shoulders” has formed?
- The pattern consists of three peaks. Under the condition of an uptrend the apexes look up, and under the condition of a downtrend – look down.
- The head is the middle peak which is to be higher than the side peaks.
- The shoulders are located on the sides of the head and below it, an obligatory condition – the right and the left shoulder are to be located on one level.
What term to buy binary options for?
It all depends on what timeframe you have set up on the chart. It is considered that a transaction should be opened on the interval three times longer than the length of the first chart candle. That is, if you have a one minute chart, then choose the option expiry of 3 minutes.
If you look at this strategy from a conservative point of view, it is best to open the PUT trade only when the price goes down and makes a breakdown in the neckline. The pattern becomes permanently formed as soon as the price movement breaks the neckline. There were times when I tried to overtake the events and buy a binary option as soon as the asset price began to decline from the second shoulder to the neckline.
But in this situation it is better to set up the option period of 30 minutes. Also, the duration of the option is highly dependent on the time-frame of the chart. If it is 15 or 30 minute chart, the option should have a period of one hour or more.
It is possible to predict the stability of direction only through analyzing the duration of the stable rate, in which binary options selected for investing were located. The less drops and refractions, the greater the probability that the growth or fall trend remains unchanged. The strategy is applicable only if the chart has a constant component of growth or fall, in the absence thereof it is better to use a different strategy, or do not start trading.
- No need to use indicators which quite often demonstrate a low level of reliability
- The strategy has a few variations
- The strategy is calculated with reasonable facility at the stage of the head formation completion and the genesis of the right shoulder formation
- The strategy is quite effective as long-standing practice showed
- The formation of the pattern takes a lot of time
- Human factor carries a great impact
- It is better to have no dealings with the pairs of cross-exchange rate basket, because their movements are often can’t be explained logically
That’s all for now. Got any questions? Just ask the expert!