Head and Shoulder (H & S) Chart Patterns

The head and shoulders chart pattern is a pattern that falls into the class of bearish reversal chart patterns. Head and Shoulder chart patterns occurs at the top of a trend and is usually used as a determinant of a bearish reversal of the existing bullish price action.

A head and shoulders Forex chart pattern is made up of:
1. Candlesticks that form a crest (the shoulder 1)
2. Second crest which is usually higher than the first one (the head)
3. Third crest which is not as high as the second, and may or may not be as high as the first crest (shoulder 2)

Head and Shoulder chart patterns can be a bottoming formation after a downtrend or a topping formation after an uptrend. The bottoming pattern is a low price then followed by a retracement then a lower low, the head, and a retracement then a higher low which is the shoulder. On the flip side, a topping chart pattern is a high followed by retracement then a higher price high and finally a lower low. Head and shoulder chart pattern is complete when the trend line which connects the 2 highs, bottoming pattern, or 2 lows, the topping pattern, is broken.

Application of Head and Shoulders Chart Patterns

To be able to identify Head and Shoulders chart patterns, there are 3 crucial things:
1. Have an eye to see how the candlesticks line up
2. Have the ability to use the drawing tool of your Forex trading system to make the appropriate traces across the highs of the candlesticks
3. Draw a correct neckline, which is the landmark for the trade entry
You should ensure that the head and shoulder have to fully form with the 2nd shoulder being almost complete before placing a Sell stop. The Sell stop should be placed about 5 pips or ticks below the neckline. When you are using Head and Shoulders chart patterns to trade in the Forex market you should know that the extent of the bearish reversal of the price action is equidistant to the distance between the neckline and the peak of the head. This is the profit point you should be eying. It is worth mentioning that the entry signal is usually reinforced when the price action is in an overbought region or is at a resistance level. 

It is very important that traders wait for the head and shoulder chart pattern to complete before they make a move. One should not assume that a pattern will develop, or become complete in the future. You should watch partial patterns keenly but you should not make any trades until the head and shoulder pattern breaks the neckline. The neckline is the landmark for the trade entry.

On the other hand, for the inverse head and shoulder, you should wait for price movement above the neckline after the right shoulder to be formed. A trade can be initiated as the chart pattern completes. You should always plan your trade beforehand, jotting down the profit targets, variables that may change your revenue target, entry as well as stop points.
Just like there are two sides of a coin, trading using head and shoulder chart patterns has its limitations. First and foremost the chart pattern is not perfect and as such can fail at times. This chart pattern is not always tradable. For instance, in the event that there is an extensive drop of one shoulder due to unpredictable even then there is a high likelihood that the price target will not be hit. Bearing in mind that you have to wait for the pattern to develop fully, it could mean waiting for longer periods which can affect your trading. 
In conclusion, though head and shoulder patterns can be subjective at times and take long to develop, the complete chart pattern provide entries, profit targets and stops making it easier to implement a trading strategy.

Leading Indicators Vs. Lagging Indicators

Investors that find themselves falling in the more traditional category of fundamental analysis often have many criticisms for those regularly implementing technical chart analysis as a basis for trades. Generally speaking, these criticisms suggest that charts “have little to do” with the economic drivers influencing market valuations or that previous price action has nothing to do with where valuations will travel next. In essence, these investors will argue that past performance is not an indication of future market activity. In order for an assessment like this to be accurate, there must be an idea that technical analysis involves only lagging indicators. But is this entirely true? 

When we look at the available charting tools that are available in the commonly used trading stations, a variety of different options can be seen. Specifically, these tools will often be divided into “lagging” indicators and leading “indicators,” and the fact that there are different types of trading tools goes far to dispel some of the misconceptions that are commonly held with respect to technical chart analysis. Here, we will look at some of the differences that can be found in these two types of indicators so that traders have a better understanding of the functions in many of the commonly used trading applications. 

Know Your Indicators 

It’s important to understand the strengths and weaknesses of any indicator before using it in any real money trade. One of the most common mistakes new traders make is to start placing indicators on their charts without having a real understanding of the calculations behind the indicator or the way it is best used in analysis. Some might say that a full understanding of these indicators is unnecessary: Buy if prices fall into “oversold” territory, or Sell if prices reach “overbought” territory. 

Unfortunately, trading is not this simple. If technical analysis was this easy, everyone could be a profitable trader. Even further, we could simply set software applications to find these signals and walk away as billionaires. The reality is that trading takes more work than this, and we will need to do a good deal of homework before we can make our indicators work for us in consistent and repeatable ways. Not knowing the (usually simple) formulas behind your indicators is not an acceptable practice - and it will negatively influence your trading results. Without this, it will be much more difficult to understand the true application behind each type of indicator. 

But before you delve into the specifics of your chosen indicator, you must first understand the types of indicators that are available. The two mains types of indicators are leading and lagging indicators. Lagging indicators alert traders to situations that trends have started and that it is time to pay attention to developments that have already become apparent. Leading indicators aim to signal trend changes before they develop. This might seem to suggest that leading indicators will lead to instant riches but the fact is that the signals generated are not always accurate. Traders using leading indicators will, in many cases, encounter “head fakes” and erroneous breakouts. Trades taken on these inaccurate signals eat into the advantages created by the leading nature of these indicators. But this does not mean that they can not be used to generate consistently profitable signals over the longer term.

Oscillators: Leading Indicators 
When using common trading platforms (such as MetaTrader), one of the main indicator options is the Oscillator. Oscillators are objects that mark two points and move back and forth between those points (always falling inside those points). When the oscillator reaches an extreme area within this 2-point range, buy and sell signals are generated. When seen near the midpoint of this range, the signal is neutral and no trade should be taken. Common examples of indicators include the Relative Strength Index (RSI), Stochastics, or Parabolic SAR. All these indicators help traders identify reversal spaces, as the prior trend reaches completion and prices are preparing to make a forceful move in the opposite direction. In the first chart, we can see examples of buy and sell signals for all three indicators.

As we can see from the first chart, price activity causes all three oscillators to move back and forth between buy and sell signals, creating opportunities in both directions. This chart, of course, represents an ideal example, where all indicators are in agreement with one another. For example, the RSI might show a screaming buy while the Parabolic SAR is showing a sell signal. In these cases, it is better to simply step aside and stay out of the market. Additionally, this is a good reason why traders should not use too many indicators on their charts as this will greatly reduce the number of viable signals that become present during your daily routines. 

Another point to remember is that all leading calculators do not use the same calculations and formulas. The RSI bases its signals on the changing levels in succeeding closing prices. Stochastics uses the highs and lows of price ranges over the time frame shown on your chart, relying much less on successive time periods. Parabolic SAR is has probably the most unique calculations of the bunch, and this can complicate trading signals when combined with other indicators. From this, it should be clear that not all leading indicators are created equal, and traders should practice with a few options before committing to any one choice. 

Momentum Indicators: Lagging Indicators 

The second major category is the “lagging indicator,” which includes tools like Exponential Moving Averages and the MACD indicator. These tools are commonly used to spot trends that are starting or are already in place. The downside to using these indicators is that (since the trend is already in place) your entry signals will come later. This means less profit as a smaller portion of the overall move is captured. The upside to lagging indicators is that they send fewer false signals, which will generally mean that you are stopped out for a loss on fewer occasions. 

In the second chart example, moving average crossovers are seen in conjunction with buy and sell signals sent by the MACD indicator. In all of these cases, the indicators were sent signals (using their accompanying formulas) and then the indicators themselves produces signals shortly afterwards. Here, traders using these signals would have missed some portion of the initial move but the validity of the signals sent would have had a better chance of eventual success. 

Conclusion: Learn about Your Indicators and Play from Their Strengths 

Traders have different types of indicators at their disposal, and this is helpful when looking for tools that fit your individual trading style. Leading indicators sent trading signals before new trends or reversals develop. Lagging indicators use available market information to send trading signals that have a slightly higher chance of being accurate (avoiding false breakouts but missing a portion of the early move). It is up to you too decide which approach best matches your risk tolerance and trading approach. It is possible that some tools will work better in some environments than it will in others, and this is an added reason why traders should practice their routines with a variety of indicators before committing real money to positions.

Managing the Mind That Trades: Micro Management of a Trader's Psychology

What mind do you bring to your trading day? Can you be specific about describing that mind? Have you intentionally organized your mind for the performance of trading centered in patient discipline? Is this carefully prepared mind rehearsed BEFORE you start your trade day so that you are emotionally and mentally fit for the rigors of the trade day? Or is preparing the mind for the performance of trading more of a hit and miss situation?

And if you do bring an intentional mind to start your trading day, what happens to it once you begin your trading day? What is your plan to prepare the mind so that you maintain excellence of execution? Preparing the mind for the trade day is not a sprint where there is initially concentrated effort for a short duration. Rather, it is a marathon where the runner has to take stock of his faculties at various points in the race and manage them for the duration of a long race.

As much as traders hear about how important emotional and mental attitude is in the performance of trading, very few traders actually manage the mind that trades as they move through the process of a trade. In the Traders State of Mind training programs I teach, a considerable amount of energy and training goes into preparing the mind for the trading day BEFORE the day starts. This becomes the foundation from which the trader learns to manage the mind WHILE he is in the process of trading.

In order to achieve a calm, disciplined impartial mind from which to trade (the Traders State of Mind), a trader must be vigilant. This aspect of the management of the mind is focused on getting the brain and the mind ready to trade. Typically, preparation for the trading day begins the night before. And preparing the mind continues when the trader wakes up and before he gets out of bed. Then, always, a period of time is devoted to mental preparation and rehearsal that includes a prayer/meditation/centering period where the trader tunes his mind into the peak performance organization of self that is suitable for trading. It is here that the trader can volitionally construct a mind rooted in calm, disciplined impartiality.

With his mind now calm and ready for trading, the trader starts his day. The earlier preparation readies the trader for the trading day so that he/she is fit to trade from a state of mind grounded in calm, disciplined authority. However, this is not enough. This calm, disciplined authority has to be maintained through the cycle of a trade. Now, let’s take a look at this cycle.

Psychology and Process Conjoin

All that preparation is washed away within a short period of time if the mind is not trained for the process of the trade. What I have found is that the early preparation stage of mental readiness is good for about 30 seconds to 30 minutes. This is where a particular psychology of performance needs to be integrated into your actual trade plan. Your trade plan and your psychological plan are not separate. Your mind is an integral part of the trading system. It is what drives your platform and methodology. So this driver has to be trained to drive his system proficiently.

The following process represents critical stages while trading where you need to be psychologically prepared (trained) to manage the circumstance of the moment.

Watching For Set-ups

Many traders become immediately blinded by an insidious bias while in this stage. With an urgency to act, they approach their charts seeking set-ups. This very urgency to act contaminates the mind that is supposed to be patiently waiting for set-ups. Instead, believing that they have to be "doing something" to be trading, the skill of patience (necessary to wait for trades to come to them) is vaporized from the mindset in a flash and replaced with an urgency to trade. And, suddenly they are chasing trades that are dubious decisions at best.

This bias gets them into trouble because it SETS THEM UP to take trades not in their trade plans or has higher risk to reward parameters than their trade plan dictates. Many a trader has done a good job of preparing the mind for the trade day, only to sabotage themselves at the beginning of the trading cycle due to this bias.

Therefore, this point is critical to managing the psychology of the trading mind. Your job is to patiently wait for set-ups to come to you. Your job is not to make things happen.

A Trade Warms Up

Have you ever noticed what happens in your mind when you start seeing all the confirmation coming in as you watch a possible trade set up? The warmer the trade gets, the more an untrained performance psychology is tested or seduced. This is a moment to take pause and regulate your psychology so that, in your excitement, you do not get in early. Or, perhaps, in your anticipation (untrained performance mind) you keep seeking more and more confirmation until the trade potentiality is over. Is the mind that watches the set up calm, patient, and disciplined? If not, you need to train yourself to be.

Trade Entry

As you go to pull the trigger, what is your mental composition? Are you pulling at the bit to jump in (euphoria) or is your trigger finger paralyzed and incapable of clicking the mouse (hesitation)? This is a moment for which you must prepare. It is not a moment that is pushed aside until it cannot be ignored. All the "man-up"ing you can muster at this point is a dangerous exercise in futility if you have not developed the mind that is prepared for this moment.

Order Confirmation

When they hear that “cha-ching” of an order being filled, something dramatic happens in the mind of many a trader. They are now committed to the trade and there is no way out of it, except through it. Risk is real now and you could lose your money. This is where many traders start a downward spiral in their ability to manage a trade effectively. Their mind has not been organized to bring the proper elements together for trade management.

Traders need to take a pause here and recollect themselves. They have now moved from looking for opportunities to exploit (offensive coordinator) to defending turf (defensive coordinator). It is at this moment that it is critical for the trader to reassert his performance psychology, or it is going to be a long ride down.

In the Red

There is nothing more unnerving for the evolving trader than to watch a trade in flux. The trade is bouncing around and spending a good bit of time in the red. You can see the red indicator light and can feel the fear and excitement. The mind starts really decompensating and the resolve to adherence to the trading plan is taking a beating.
Preparing for this situation should be part of every trader’s practice. The trader must learn to regulate it, or the trader’s performance mind moves from focusing on execution to being fixated on losing capital. The trader’s job is to maintain the mind that is focused on the performance of execution. Yet, an emotional hijacking is underway. This is why this moment in trading needs to be anticipated and trained for. Otherwise, it keeps you from becoming the trader you could be.

Taken Hostage by Marginal Profits

This is one of the biggest moments that separates a scratch trader from a consistently profitable trader. If the trader has not managed the mind that manages the trade before this moment, there is a powerful urgency for him to take the profit early from the trade, while the trade is still profitable. Then when he cashes out and feels the temporary emotional relief, he watches the trades move to his targets – just like his trade plan outlined.

The problem is that the trader’s emotional state has not been managed somewhere along the progression from trade entry, to being in the red while in the flux, to the moment of profitability. Any of these moments can become a signal that triggers the need for practicing emotional state management. Maintaining these critical trade management moments, to the trained mind, are planned for and practiced. The key emphasis here is training. The trader is taking the mind he prepared before trading began and reasserting it – anticipating these moments so that he is prepared for the stressful conditions of trade management.

Exiting a Trade – Taking a Loss

During the process that is being laid out here, the emphasis is on management of the mind that executes the trade – and not on whether you are winning or losing. If you manage the mind that trades so that you execute your trade plan from a peak performance state of mind, your methodology will take care of the winners and losers. Your job is to manage the mind that trades.

The questions to ask when taking a loss are: (1) Was it a method mistake? (2) Was it a psychological mistake? Or (3) was it simply being on the wrong side of probability? If it is a method or psychological mistake, then you learn from the mistake (which is how the brain learns) rather than dwelling on the loss and deepening your fear of losing. If you don't learn from this, you bring this fear of loss into your next trade. And that contaminates the mind that trades.

Exiting a Trade – Winning

One of the most dangerous things that a trader can do is to get excited by a win while he is still trading. (After your trade day is over is the time to celebrate the win.) While trading, the thinking mind is greatly influenced by the emotional state that you bring to the act of trading – particularly to the evaluation of set ups. When you feel good, you are bringing a mind fed by euphoria into the evaluation of set ups. And euphoria will cause you to believe with certainty that the good times are going to roll and then you no longer can evaluate your trading risk effectively.

When you win in trading, the calm, disciplined impartiality you worked to achieve before you started trading is maintained by regulating your emotions and mind. Until the calm, disciplined impartiality is re-established, you are not fit to trade with a mind designed for trading success.

Reviewing Your Trades

Particular emphasis and attention needs to be placed on the mind with which you review your trade day. Are you beating yourself up for the mistakes you made or the lost opportunities you now see in your charts and performance? Or are you acting as a kind, wise teacher to yourself? The latter creates an emotional space for learning to occur while the former creates an emotional vortex that keeps emotional reactivity at the forefront and compromises the capacity for learning

Toward a Peak Performance State of Mind

This is the work of the inner game of trading. Once you establish a process that brings forward into your working mind a peak performance state for trading (calm, disciplined impartiality), then you can begin to practice it in these specific moments in the trading cycle.

The mind you brought to trading is simply not going to be the mind that is going to produce success in trading. The whole notion of winning has to change. Success in trading is not about winning (or losing for that matter). It is about the psychology you bring to execution. It is about the mind that you bring to the performance of trading, so that you execute the trade with excellence. There is no "need to be right" about the trade, only its execution. If you do this, your methodology will take care of the winners and losers – and the money in your trading account.

Why Successful Traders Use Fibonacci Retracements

Support and resistance levels on bar charts are one of the major components in the study of technical analysis in Forex trading. Many traders make use of support and resistance levels to examine entry and exit points when trading markets. When establishing support and resistance levels on charts, a trader should not overlook Fibonacci percentage ‘retracement’ levels.

What is a retracement? A retracement is a pullback of the currency price before the price resumes the original direction of movement. 

What is Fibonacci retracement? Fibonacci retracement is one of the many aspects of Forex market technical analysis. Fibonacci in the Forex market is a type of line study used to predict as well as calculate price pullback levels. It is placed directly on the price chart within the trading platform and this technical indicator will automatically calculate the pullback levels on the currency price chart.

Fibonacci Retracement is used to determine support and resistance levels in the market. Fibonacci Retracement is essentially based on the assumption that the market will follow a predictable pattern and at particular points it will retrace its steps before moving on with its original direction. This technical analysis utilizes ratios from numbers in a series; you can take 2 numbers in the series and divide them to form a ratio. The 2 Fibonacci technical % retracement levels that are most crucial in Forex market analysis are 38.2% and 62.8%. Most Forex market technicians will track a retracement of a price uptrend from the beginning to its most recent peak. Other important retracement %s are 75%, 50% and 33%. For instance, if a price trend starts at 0, peaks at 100, and thereafter declines to 50, then it would be a 50% retracement. The ratio of 0.0% is considered the start when the Forex market retraces itself while the ratio of 100% marks when the market entirely reverses its direction. These 2 points are referred to as the trough and the peak respectively. Once you identify these 2 points in the trading patterns, then it is time to start identifying possible support and resistance levels. 

Why Use Fibonacci Retracement
The main purpose of using technical analysis in the Forex market is to identify trends and patterns that can be utilized to evaluate the optimal time to buy or sell currency on the market. There are many different strategies that traders employ for technical analysis and Fibonacci Retracements is one of the many strategies that can be used. Fibonacci Retracement is based on the belief that the Forex market will move in one particular direction and at specific points it will retrace its steps before moving forward in its original direction. This strategy attempts to identify these points on time so that you can make a successful trade.

The price of a Forex currency pair does not necessarily move up or down in a straight line. Usually it moves up or down in a zigzag pattern. Fibonacci Retracement Levels comes in handy as the tool that is used to calculate where the zigzag will stop. The Fibonacci levels are 38.2%, 50% and 62.8%, these points form the points at which price is likely to make a pullback. 

Fibonacci Retracements are an effective technical analysis strategy that Forex traders can use to profit from strong trends when trading in the Forex market. The ratios created helps traders to determine when you should enter the market based on a set of numbers that naturally occur in nature. During the trend, the market will retrace by a certain % point and that pullback is essentially at one of the Fibonacci ratios. However, to fully profit from techniques such as Fibonacci retracements you need to understand other aspects of technical analysis as well.