Head and shoulders patterns in binary trading are reversal patterns that indicate a possible change in trend from a bullish to a bearish direction. In this article, we will show you how to recognize such patterns, read them effectively, and use this strategy for your binary trading success.
Key Facts about Heads and Shoulders Patterns:
- Head and shoulders patterns in binary trading are reversal patterns that indicate a potential trend shift from bullish to bearish
- The pattern consists of three peaks, with the middle being the highest (the head) and the outer two (shoulders) being lower and roughly equal in height
- Indicators such as trend, momentum, volatility, and volume indicators provide additional data to help traders make informed decisions
- Chart patterns are categorized into continuation, reversal, and bilateral patterns, which help traders predict market trends and price movements
What is the Head and Shoulder Pattern Strategy in Binary Trading?
What you will read in this Post
The head and shoulders pattern strategy in binary options trading involves identifying and using the pattern to anticipate a market reversal. To apply this strategy effectively, start by spotting the pattern of the head and shoulders and follow the trend until it breaks the neckline. Once the price drops below the neckline, it signals a bearish reversal, indicating it’s time to take a short position.
Head and shoulder patterns are among the most well-known and reliable formations in binary options trading. They are especially useful for technical analysis and are one of the easiest reversal patterns to recognize. The pattern occurs when the asset’s price moves contrary to the prevailing market trend.
The head and shoulders pattern consists of three peaks: the middle peak (the head) is higher than the other two (the shoulders). This formation helps traders predict a shift from a bullish trend to a bearish one.
How Do You Pinpoint the Head and Shoulder Pattern in Binary Options Trading?
The head and shoulder patterns are easy to identify and read in binary trading. As the name suggests, this pattern has three consecutive peaks, one of which is higher than the other two.
As seen in the image above, the highest peak represents the head, and the other two, which are about the same size, represent the shoulders. To see the neckline, draw a trend line between the two shoulders. The whole structure resembles a human head and shoulders.
The left shoulder can be seen by looking for price declines followed by a bottom and then a successive rise.
The head is formed when the value of the asset falls again, forming a lower bottom. The other shoulder is formed when the price rises again but then falls to form the bottom.
Head and shoulder patterns indicate that there is a high probability that the existing uptrend will be reversed, which means that the previous uptrend is likely to end soon.
How To Understand the Head and Shoulder Pattern Formation?
For the Left Shoulder
When the price gets too high for the current market conditions, the bull steps back and makes way for the bears to pull the price down. If the price falls but then makes a way back up, the left shoulder of the pattern is formed.
For the Head
The bulls then try again to push the price higher. And so the head is formed.
For the Right Shoulder
Although the price has weakened, the bulls are attempting to force the price to a new high, forming the right shoulder, which is lower than the head.
Neckline
Finally, the bears come out strong and take over. They pull the price down and break the neckline.
Once that happens, the trend will be down for some time.
Every head and shoulder pattern is different. The theoretic design will never occure in the markets. You need to be flexible.
What Does a Head and Shoulders Pattern Indicate?
The head and shoulders chart is believed to indicate a trend reversal from bullish to bearish and that an uptrend is about to end. This is one of the most reliable and consistent trend reversal patterns for investors.
How To Trade With the Head and Shoulders Pattern in Binary Options
Wait for the pattern to fully form before using the head and shoulders strategy in binary options trading. Sometimes, a partially formed pattern may not signal a reliable reversal. Avoid trading until the price breaks below the neckline.
To maximize accuracy, monitor the pattern closely and wait for the price to drop beneath the neckline after the right shoulder completes.
Only enter the trade once the pattern is fully formed. Ensure you’ve set your stop and entry points and your profit targets. Keep an eye on any price fluctuations that may affect your stop or profit levels.
The Entry Points:
There are two ways to join the entry point. The first and the most common entry point is the breakout point. Another entry point is when a breakout occurs, followed by a pullback to the neckline of the pattern.
The second entry point requires you to be patient, and it is the chance that you may miss the move altogether. This one is more speculative if the initial breakout direction starts again and the pullback comes to a halt. You might skip the trade if the price keeps flowing in the direction of the breakout.
How to Head and Shoulders in Binary Options Trading
There are many methods in which the pattern is used in binary options, and the most used ways are:
Trading Touch Options
You can trade a touch option when the right shoulder is formed. At this juncture, you can make an objectively precise forecast that the market will get through the neckline in the coming time.
The chances of accomplishing the trade are high if you can seize the opportunity to find a touch option within the range of future movement.
Also, keep an eye on the movements of the second shoulder. If it drops significantly more than that in the prior movements, you could attain some rewards.
Trading the High/Low Option
After the breakout, there’s a high likelihood that the market will revisit the neckline. This is a predictable event, and many traders take advantage of the pullback to make their trades.
The potential for a high payout is strong if you can identify a touch option within the pullback’s movement while others wait for the pullback to complete.
Once the pullback finishes, it’s clear that the market won’t cross the neckline again in the near future, making it the ideal time to enter a high/low option trade.
The Inverse Head and Shoulder Pattern
The inverse head and shoulder pattern is the same as the typical head and shoulder pattern but overturned. It is also known as the head and shoulders bottom or reverse head and shoulder.
See an example here:
It starts to form with a downtrend and has three main components:
- After long bearish trends, the price falls to a manger or trough and afterward rises to the form amount. This forms the left inverted shoulder
- Then again, to form the head, the price falls to form a second manager markedly below the original point and rises again
- For a third time, the asset’s value falls, but only to the level of the first manager, before rising once more, reversing the trend and eventually forming the right inverted shoulder
A reverse head and shoulders pattern signals that a trend going down earlier will reverse and move toward an upward direction.
Are Head and Shoulders Bullish or Bearish in Binary Options?
The standard head and shoulders pattern is found when the uptrend is about to finish, making it a bearish trend reversal signal.
We have the inverted or reversed head and shoulders pattern for the bullish trend reversal. As stated, it is the same as the typical one but is mirrored and indicates that the bearish trend is about to reverse.
When the price passes the neckline from below, it becomes a bullish trend signal.
Can Head and Shoulders Be a Continuation Pattern?
The head and shoulders pattern is considered to be a reversal chart pattern, but if you go deeper to analyze it, you can see that it is a continuation pattern.
You can make some successful trades if you can find the difference between the reversal and continuation patterns. You can buy your asset near the support level of the continuation pattern, as this will minimize the risk.
To check for the continuation trend, here are some features that are distinct from the primary reverse trend:
- Continuation patterns take place after a shrill change in the price
- If you examine it from a more wide-ranging viewpoint, you can see that this makes the head and shoulders seem more like a union than a reversal pattern
- If there is a possible continuation pattern taking place in an uptrend, the troughs of the continuation should get somewhat close to a similar level
It is okay even if the last trough is higher than the others, but if the price goes considerably below the lowest locus of the pattern, then it is probably a reverse pattern.
- In the downtrend, if there is a potential continuation pattern, then the high points of the continuation pattern must extend up to the same level
It is fine to have the last high lower than the others; however, if the price goes above the highs of the patterns, it would stop being a continuation pattern and become more like a reverse trend.
- It is highly anticipated that the trend will continue to follow the pattern in the continuation pattern. Only if the pattern drops out of the uptrend is the price likely to reverse
Conclusion: Use the head and shoulders strategy for success
Chart patterns are key tools for analyzing market trends and price movements across various time frames and market environments, with head and shoulder patterns being particularly popular.
These patterns are easy to identify and, once completed, reveal entry points, stop points, and profit targets, helping traders plan their strategy. While not always 100% accurate, studying these patterns can guide traders in making informed decisions and securing profits with the right broker.
Most commonly asked questions about head and shoulders pattern:
What is the head and shoulders pattern in binary trading?
The head and shoulders pattern is a popular reversal pattern indicating a potential shift from bullish to bearish. It consists of three peaks: a higher middle peak (the head) and two lower, roughly equal peaks on either side (the shoulders).
How do I identify the pattern of the head and shoulders?
To identify this pattern, look for three consecutive peaks where the middle peak (the head) is higher than the other two (the shoulders). Draw a trendline connecting the bottoms of the shoulders to form the neckline, and watch for a break below it to confirm the bearish reversal.
When should I trade using the head and shoulders pattern?
You should wait until the pattern is fully formed and the price breaks below the neckline before making a trade. This confirms the pattern and signals a bearish reversal, indicating it’s the right time to enter a short position.
Can the head and shoulders pattern be used for high/low binary options?
Yes, after the price breaks the neckline, many traders use the pullback to the neckline as a signal to trade high/low binary options. Once the pullback completes, it’s clear that the price is unlikely to cross the neckline again, making it the ideal time to enter a trade.
What is the difference between the head and shoulders and the inverse head and shoulders pattern?
The standard head and shoulders pattern signals a bearish reversal from an uptrend, while the inverse head and shoulders (or reversed head and shoulders) pattern signals a bullish reversal from a downtrend. The inverse pattern is a mirror image of the standard one.
