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Inverted Head and Shoulders Patterns

Inverted Head and Shoulders on EURCHF

Inverted Head and Shoulders on EURCHF

Inverted Head and Shoulders on EURCHF is a classical chart pattern, which is located at the bottom of a falling wedge. Let’s take a closer look.

The premise

Let’s take a look at the weekly chart of the EURCHF currency pair. We, need to start with the weekly chart because we need to understand the context first. So, we can see that after the January 2015 flash crash, the price moved in an orderly manner into an ascending channel. After the ascending channel, the price moved into a falling wedge. And now, at the bottom of this wedge, we can see our inverted head and shoulders pattern. The most important thing to remember here is that this kind of setup is one of the best a trader can have. And that’s because the smaller pattern is in perfect alignment with the larger one.

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Inverted head and shoulders on EURCHF weekly chart

How did I trade the inverted head and shoulders on EURCHF?

I simply placed a buy stop order slightly above the resistance of the pattern. And, I considered resistance, the May 18th 2020. Consequently, my order is open on May 22 2020. You also need to know that I was looking for this pattern for a while. And I also mentioned it in the Weekly Market Update May 24 PDF file. Here’s the daily chart from May 23. An important detail is that you can take a look at the first chart of the article and the next chart. There’s basically two ways in which a trader can draw this pattern. But, I think the correct one is the next chart. And that, because of the very high volume from the left shoulder. Volume which acted as a stopping volume in our case.

inverted-head-and-shoulders-on-eurchf-daily-chart-detail
Inverted head and shoulders on EURCHF daily chart detail

The outcome

This was an interesting trade for me. And that’s because after the breakout, Friday, on May 29th the price made a one-day reversal candle. This means that the price went up in a very strong manner, only to come back at the lows of the day. Moreover, the price made a new low for the day and reversed back a little to close at the opening price. So, how did I manage my trade when I saw this candle?

How did I manage the inverted head and shoulders on EURCHF?

Remember, my first objective is to preserve my capital. Therefore, Monday, the market opened a bit higher. And, I decided to close half of my trade with a very, very small win (almost 0,01%). It could’ve been a small loss also, it doesn’t matter. And, I also decided to move my stop loss under the low of the Friday candle. In this way, I managed to lower my risk from 0,07% (40€) to 0,012% (8€). Of course, my profit wasn’t 112€ anymore, but it was still 56€. And, from my point of view, to risk 8€ to get 56€ it’s a very good thing. And now, you can take a look at what happened next.

the-outcome-of-the-inverted-head-and-shoulders-on-eurchf
The outcome of the inverted head and shoulders on EURCHF daily chart

The conclusion

The most important thing to remember from this trade is that no matter how good a setup might look, a trader always need to be prepared to manage his trade. I know, that some of you might think that I could’ve made 112€ from this trade instead of 56€. And this is also a point of view. But from my perspective, it’s not the proper way to manage your capital. And that’s because, there will always be trades like Inverted Head and Shoulders on ETHUSD which will take off immediately and never look back.

One more thing

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