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Head and Shoulders Patterns

Head and Shoulders Pattern on EURJPY

Head and Shoulders Pattern on EURJPY

Head and Shoulders Pattern on EURJPY is also a classical charting pattern. It’s located at the end of a pullback. So, in this case at the end of a rising wedge in a downtrend.

The premise

If we take a look at the daily chart of EURJPY we’ll see that it looks very similar with the chart of EURUSD and AUDUSD. So, there is a dominant downtrend on this pair too. After the price reached a bottom, it started to reverse, taking the shape of a rising wedge. As you now, the rising wedge is a continuation pattern in a downtrend. There is only one situation in which a rising wedge has bearish implications and that is when it is located at the end of an uptrend. You can find such an example here: Rising Wedge Pattern on #PG.

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Head and shoulders pattern on EURJPY daily chart

How did I trade the head and shoulders pattern on EURJPY

As there is not much to say about this SHS pattern, all I had to do was to place a sell stop order slightly below the neckline. In this case I considered the low of the January 30th daily candle. Therefore, my order is open on February 10th 2020. So, let’s see the outcome of this trade.

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The outcome of the head and shoulders pattern on EURJPY daily chart

The outcome

After the breakout, the price dropped until February 18th 2020. But, on February 19th the price was brought in a very strong manner. It was a bull candle which engulfed the previous seven daily candles. Should I be scared about it? Don’t think so. If we take a look at the EURUSD and AUDUSD the price made the exact same thing before the next drop. Though, the difference it is that in this case, the next daily candle went even more into the upside. And this second bull candle is the same candle which activated my stop loss order. Below is the outcome of this trade.

The conclusion

The conclusion is a simple one this time, but is very important. This is the prefect example of a pattern which morphs into another pattern. I talked about this phenomenon here: Head and Shoulders Pattern on GBPCHF. Another important thing here is to not be discouraged because of a loss. For example, both EURUSD and AUDUSD trades provided a risk reward ratio of 1:3 for EURUSD and 1:4.22 for AUDUSD. That means I can afford to lose 7.22 trades to be on breakeven again. Therefore, you shouldn’t let a small loss to discourage you or to scare you to place your orders.

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