Trading Head and Shoulders with Binary Options
Hello, traders. Welcome to Binary Options Strategy and the 10th module Trading Binary Options Using Price Action. In this lesson we’re going to learn how to trade the head and shoulders. And, the head and shoulders formation is one of the most reliable reversal formations there is, or reversal patterns there is. And in this lesson I’m going to teach you how to trade it and how to be extremely profitable once you learn how to spot it.
Now, let’s start by defining what a head and shoulders is. Head and shoulders are very strong reversal patterns that take more time to complete than other patterns. And the reason they take more time to complete is because they are found at the very top of upmoves. This means that bulls are in control of the market when the head and shoulders start to appear. And because they take longer to complete they are way more accurate than triple candlestick reversal patterns, for example, and even double single candlestick patterns.
Head and shoulders take a lot of time to complete and sometimes when you are patiently waiting for the pattern to complete, it will just not break out. But once they do, they are almost 100% accurate. This pattern is always found at the top of an uptrend. This means that if you see a head and shoulders pattern develop mid-move or inside of a range, it’s not considered as one and you should not be trading it. It should be avoided.
And technically speaking, the head and shoulders pattern has the following formations inside of it. First of all, at the top of the upmove, we have a rise to a new high or to a peak and a subsequent decline. Then, price rises above the former peak and again it declines. This means that we have a rise and a new high, a decline then a new high and another decline and then finally price rises again but not to the second peak and declines once more. This means that the first rise is the shoulder of the formation, we have a decline then we have a higher high which is the head and a decline and then we have a lower high which is the other shoulder of the formation.
And this is one of the most reliable reversal patterns because of the three attempts by bulls to break above and make new highs. And this is the key of this pattern. You need to wait for bulls to give up and bears to take control and the pattern to break for you to be able to profit from it.
Now, let’s look at an example of head and shoulders, okay? Now you can see that we are in an upmove right now, okay? We have a rise to a new peak and then we have a decline. Then, we have another rise to a higher high and a subsequent decline. Then, we have a third rise and a subsequent decline. This, as you can see, is visually a shoulder, a head and a shoulder.
Now, what you need to do and what you need to wait for is for the neckline to break. The neckline is the trendline that brings all the lows together. Okay, as you can see when price declines for the third time, it tests the neckline. If the neckline doesn’t break and price moves above, the head and shoulders is not complete and should not be traded. But once the neckline is broken, just as in this case, we have a signal to buy. Put options once this candle closes below the neckline. And as you can see right here, even though we have a small correction to the upside, price continues and flushes all the way to the lows. And this is how you are going to be making money trading head and shoulders with binary options.