Jordan Kuzmanov breaks down head-and-shoulders and inverted head-and-shoulders chart patterns as trend reversals. After the neckline breaks, measure the distance from head to neckline and project it from the breakout point to find your profit target. He walks through live examples on cable charts and stresses back-testing over blind pattern following.
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Hi and welcome to another educational video from the Traders Academy Co-op, guys. My name is Jordan Kuzmanov. I'm the chief trader in the Co-op, and today I would like to present to you the head and shoulders and the inverted head and shoulders patterns, which are absolutely amazing chart patterns. And in my opinion, every trader should be aware of those. So without further ado, let's Let's go ahead and check out the presentation that I've prepared for you. Now, first thing is first: What is the head and shoulders pattern? First thing we should mention is that this is a trend reversal pattern, meaning that we have a trend. Once we see this pattern and we can identify it, we are looking for a reversal. When it comes to head and shoulders, we're looking for bullish trend to come before that. Right? So price is moving upwards. We see this pattern. We see the confirmation, and then we can say, okay, we're probably going to reverse and move lower now. Right? So this part is really important. If you're in a bearish trend and you see Head and shoulders, no go. This is not what we're looking for. So, what's the actual pattern? The actual pattern consists of a few elements, as you can see here. We have the left shoulder, which is attempt for the price to create higher highs. We get pullback, then we get the head, which is the actual highest point inside this bullish ongoing momentum. Then we get deeper pullbacks, and we still have attempts for the price to go higher, but these attempts fail, and the head is keeping that level intact. Okay, so at the end, what we get is something like that, right? This kind of pattern: shoulder, head, shoulder. The last element is, of course, the neckline, and the neckline is created by connecting the left shoulder, the bottom of the left shoulder, together with the bottom of the right shoulder. So once that happens, and if we get the breakout, this is where it starts to become interesting, but we're going to cover this part in a minute. Now let's talk about the 2 variations we can see. What we saw before in the example was a head and shoulders with downward neckline, okay? And we can have another one which is the upward neckline. The difference is in the angle of the neckline. So in one case the neckline is going downwards, in the other case the neckline is going upwards. They're both tradable. However, this one with the downward neckline— remember that part, guys— this type of variation is much more reliable than that one. All right, so if you see this one, either use less risk or be more skeptical in general for this type of formation. Next question is how to actually trade this pattern, and the answer is very simple. Once we identify the pattern, we need to first of all confirm a break below the neckline. In that case, this is happening right here. This is where the breakout is. This is where the head and shoulders is is actually confirmed. Next thing we're going to do is we're going to project the distance from the head straight line down, and wherever it meets the neckline, this distance we're going to project from the breakout point. So let's say this is 50 pips or points depending on the instrument. This is where we get the breakout. So we project 50 downwards right here, and this is our target. Simple as that. Okay, next we have a very nice example. I believe that was cable. That chart is from cable. But here what we can see is first Rule in place. Bullish momentum, check. Next, we start identifying the elements: shoulder, head, shoulder, neckline. Okay, so once this neckline was broken, I go ahead and project that distance from the very high wherever it meets the neckline. I projected from the breakout point and that becomes my target. And as you can see, in that case the target was reached. Okay, now I would like to take a moment, guys, and invite you to go ahead and check out the Traders Academy Club. This is the place where me and Vladimir are working with other traders, and it's basically fantastic community. So if you're currently beginning with trading or you're already an advanced trader just looking for community where you can share ideas and just hang out with other like-minded people, go ahead and check it out. Also, we have a free Telegram channel. For both of these, you can find the links below in the comment section. In the Telegram channel, we are sharing absolutely free everything— educational materials and trade setups and ideas. So if you're curious, please have a look. Now back to the subject of head and shoulders. The opposite of head and shoulders is the inverted head and shoulders. This is the opposite pattern, so all the rules here apply. They are absolutely the same. The only difference is it's vice versa. So in that case, we have bearish trend. All right, this is where we're going to get the head and shoulders pattern, the neckline, and this time we're going to be looking for buys instead of sells. So no need to go ahead and cover, um, the pattern again. It's pretty obvious. We have the left shoulder, the head as the lowest point, and the right shoulder. Then we connect the 2 shoulders, the heights of the 2 shoulders, to get the neckline. And once we get the breakout, this is where we would be looking for possible buy opportunities. Again, we have variations as we saw in the previous example. Those could be equal as well, but this is somewhere in between. That's why I don't want to make you confused. We're just going to look at the downward and the upward So in our case, downward neckline— this variation is weaker or less reliable. Upward neckline is more reliable. The whole idea, guys, is very, very simple. You want to see inside this wave or that leg momentum, and since we're going to be looking for buys If the price breaks the previous high, it becomes much more conservative, right? It shows us that there are bulls here and the chances of continuation higher are much, much bigger. Same thing is happening with the regular pattern. So if that low was broken in order to create downward neckline, it means we have power for the sells. And that's why this pattern is much more reliable. There is no crazy explanation behind it or anything. That's it. It's super simple and it's logical. And you should, by the way, always ask yourself the question why, right? And there must be answer behind the why. Don't blindly trust anything. And when possible, do your own research, do your own statistics, and just make sure it works for yourself. Okay, so that's about the variations. Uh, how to trade it, it's pretty much the same. We're measuring the lowest point from the head straight to the neckline. We project this amount of pips or points through the breakout zone, and that becomes our target. And now time for an example. So here it is, bearish trend. So this part is good. Then we have— sorry, that's a bit too much. Then we have left shoulder, head, A right shoulder, and we draw the line. Okay, in that case, the head formed here a high which, in my opinion at least, should be covered instead of doing this, right, to cover the right shoulder. So that's the point which I would like to see broken right here. This is the highest the highest high in between. So this is the one I'm using. So after that, as we can see, breakout. And this time we have downward slope, by the way. So this setup, this example, would be less reliable from a setup which would be like this, let's say, right? That's the idea. And here the target also could be reached So that would be all for this video, guys. Make sure to go ahead and check out the other educational videos we have, uh, in the channel. Of course, free Telegram links below also in the description so you can click them. And that's it. Thank you for watching.
