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Head and shoulders trading formation is the most recognized reversal technical pattern and it is very popular among novice forex traders. Many of them can see head and shoulders patterns even if there is no sign of it on the chart.  

Head and Shoulders formation shape includes two shoulders, left and right, and a head between them. 

There are two kinds of H&S.  The first would be the pattern giving us the signal that the trend is reversing to the downside.  This formation has the head with the high price between both shoulders. The second is the reversing trend to the up side.  This formation has a head with the low price between two shoulders. 

 The alternation of waves in the market occurs constantly and practically any sequence of contradictory movements can be seen as a potential head and shoulder formation.  This mistake is compounded by stress involved in forex signal trading.  An inexperienced forex trader might have the position open after selecting a forex signal from an inappropriate pattern and then psychologically looks for additional confirmation of his trade plan.  It is a very common thing to happen while trading forex signal under a lot of pressure. 

This price pattern is the most difficult to trade as it is the most difficult to recognize before we can take an advantage of it. There is a huge amount of forex signal trading books and forex signal material describing head and shoulders formations.  However, in practice it all looks a little different.  According to textbook H&S should have shoulder on the same price level.  The neckline is supposed to lie on a parallel line. 

On the chart things don’t always look as clear. This formation usually takes a significant amount of time before it is visible at all and qualifies as a potential H&S.  To place a forex signal based on such assumptions we need much more confirmation to make this pattern valid for future trading.  When it is not fully formed it can give us a signal of something other than H&S.  The neckline is not always a straight line; it can be a simple trend line or upper border of the channel. Until the second shoulder is almost fully formed we cannot consider H&S as a valid formation. We can only place forex signal trades based on such pattern when it is clearly visible on the chart. 

 If you have any doubts at all about identification of the formation do not construct your forex signal trading based on such pattern. Exclude it from your trading plan and move on. 

Technical analysis recommends placing forex signal trade in the direction of the move at the break of the neckline. Some traders would open positions on the possible top of the second shoulder to minimize the risk.  Ideally all forex signals based on head and shoulder formations are placed with the break of the neckline. 

Always apply proper forex money management structure and place your stop loss order accordingly to current situation on the market.