By Sean Hyman One thing I’ve learned over the years is that pros can easily see things in charts that the novices simply don’t recognize.

For instance, one of the most famous charting patterns out there is called the “Head & Shoulders” pattern. Let’s take a look at what it looks like below.

As you can see from the chart above, the chart gets its name because it looks a bit like a human torso, with two shoulders and a head as its high point.

The head and shoulders pattern starts off in a normal uptrend (with “higher highs” and “higher lows”). Then something interrupts this pattern and we see a shift in the balance of power.

All of the sudden, the chart shows that traders can’t simply bid up the currency pair’s price into fresh, new highs anymore. In other words, there aren’t enough buyers, so sellers take over. Sellers start to dominate the pair and push it into its first “lower high” in a long time.

You will notice that we also draw what’s called a “neck line” on the chart. This line connects the lows and can be at an angle. When the neck line breaks, “lower lows” are now starting to hold too.

So this pattern shows the shift in the balance of power. The break of the neck line is where sellers take back control and are now the offensive players for that trade. This is the start of a new downtrend.

Those that begin to recognize this important pattern will pick up on trend changes much faster than those who are oblivious to it.

Now…it gets better. Did you know you can do a “minimum price target” based off of this pattern too? Yes!

You simply measure from the top of the “head” down to the neck line (top yellow line below). Then project this distance straight down (bottom yellow line below). Next draw a horizontal line (green line) to the right once you are at the bottom of the bottom yellow line. This will give you a “minimum price target.”

It’s called a “minimum” because the trade can go much further than that level eventually but it rarely if ever falls short of this target. Therefore you can stay short until you get to your minimum target and then consider taking all or part of your profits at that point.

If you take partial profits, then move your stop down a bit to ensure no loss on that part of the trade too. Give it plenty of breathing room because retraces from the target levels are common. However, as you can see from the GBP/JPY daily chart above, the pair fell much, much further in the months thereafter.

Once a target is reached and the pair continues a steep fall, you can put a downtrend line (connecting the major high points) and get out of the trade when the downtrend line breaks upward through it and closes above it.

There are many charting techniques like this that have minimum price targets. However, the “Head & Shoulders” pattern is by far the most popular. I’ll go into more charting tricks, tips and secrets tomorrow.

Till then…

Best Regards,
Sean Hyman