The ability to predict how the market will pan out is a valuable asset for any trader to have.  Ralph Nelson Elliott developed the Elliott Wave theory to allow traders to anticipate market behavior.

While it is not inherently possible to know what will happen tomorrow, having the right information is usually the first step to understanding the market. It, therefore, allows you to develop some possible outcomes.

Where Did The Theory Originate?

Stock trading in the past was significantly more complicated than it is today. Back then, there weren’t any computers to assist in analysis. Moreover, a large number of traders misunderstood the market.

At the time, the general idea of a cyclical market was absent. Furthermore, people couldn’t connect how the general psychology of the population affected the markets. As such, traders thought the market to be chaotic and unpredictable.

It was a difficult time to trade and harder to make money off the markets. Nevertheless, R.N. Elliott’s work throughout the 1920s helped with this.

·         Founder – R.N. Elliott

R.N. Elliott was an American author, and his financial experience enabled him to develop the Wave Principle. His study of stock market behavior was based on seventy-five years’ worth of market data in 1930 culminating in his third book, The Wave Principle.

Elliott’s work, however, was not focused solely on financial markets. Further on in the 1940s, R.N. Elliott applied his Wave theory onto human behavior. Two years before his death, Elliott published his final book, Nature’s Law – The Secret of the Universe.

Today, seasoned traders know all too well how vital the Elliott wave theory is when it comes to making market predictions. As such, a lot of traders subscribe to the principle while other analysts even base their prediction methods on the Elliott Wave theory.

·         Purpose

In a broad sense, R.N. Elliott founded his theory to help traders make sense of the chaos that was prevalent in the market at the time. An unpredictable market is not only challenging to trade; it is also risky and you can burn your account quite easily.

Traders often need to know, or at least have a bearing on future market movement. Trading without market insight is akin to gambling, and the chances of you gaining and losing money are largely the same.

Therefore, the Elliott Wave theory helps level the playing field further increasing the chances of you making a profit from a trade. Information is a critical aspect of trading and could make or break any trading move.

So knowing when the market is expected to rise or fall should guide you as to whether you can trade or not.

Aspects of The Elliott Wave Theory

The Wave theory is a powerful tool which traders use to make headway in the trading world. However, this principle is based on several aspects which you need to understand to use it while trading.

1.      Mass psychology

Mass psychology, as envisioned by R.N. Elliott, is what drives the market. People buy and sell assets or stocks on the market. Typically, one person cannot influence the direction of any market. However, if multitudes of them hold a similar opinion concerning the market, then they would be able to hold sway in any market.

Mass psychology is drawn from what the population thinks of the prevailing market. This force is, however, controlled by external factors in the market that are out of their control. In a broad sense, market psychology usually means going with the flow – you don’t necessarily need to be right, but rather be among the ‘right group’.

Financial markets are heavily influenced by mass psychology. This influence is evidenced by how price movements sharply move following global events.

On the other hand, mass psychology also points to a trend in the market. Favorable prices often attract a lot of buyers who seemingly think alike. Common trading strategies such as adhering to support and resistance zones indicate the ‘herd mentality’ at work since a lot of traders in the market are reacting to the current price action.

While mass psychology seems to be a valid form of market behavior, human beings are known to be irrational. Market bubbles are hardly uncommon in any market and usually result from irrational behavior among investors. In the end, the bubble bursts and a lot of market participants losing their investments.

Market bubbles have occurred throughout history, some as far back as the 1600s. This further points out how irrational humans have been since trading began. A more recent example is the housing market crisis of 2007.

2.      Fractals

While analyzing market data, R.N. Elliott found out that the market behaves cyclically. On a trading chart, this cyclic nature is shown by repetitive tops and bottoms along the price curve which in the Wave theory, are fractals.

Fractals are always in repetition and Elliott found out that it was possible to predict future market behavior based on these waves.

Fractals often take forms which can be sub-divided into smaller, yet identical fractals. Fractals, surprisingly, are not reserved for trading. They actually occur in nature as well constantly repeating in different scales, for example, a snowflake and a nautilus shell.

Therefore, just like natural fractals, Elliot waves can also be subdivided further into smaller waves as we shall see below.

3.      Impulse waves

The Elliott Wave theory indicates that price action takes place in a series of waves. An impulse wave generally follows an uptrend.

Usually, impulse waves are smaller iterations of the more significant wave. These exhibit a 5-wave pattern which follows the general uptrend.

As it rises, the wave reaches higher prices over time, mainly because price increases are more substantial than decreases.

4. Corrective waves

The opposite of an impulse wave is a corrective one. These trends downward and usually occur within the prevailing market trend. After an impulse wave rises, a corrective wave follows.

Corrective waves are much smaller than impulse waves and usually constitute a 3-wave pattern. The corrective waves often allow traders to enter the market since they signal a fall in the price of an asset.

Elliott Wave Pattern General Outlook

Now that you know the different aspects that are part of Elliott waves, it is time to see what they actually look like.

As seen earlier, the Elliot wave is composed of both impulse and corrective waves. These sub-waves are all part of the general pattern and are generally indicated on the wave.

Any market experiencing a trend will have an Elliott wave moving in a 5-3 pattern – this is derived from both impulse and corrective waves.

The first 5-wave pattern seen is the impulse wave. These waves are typically numbered 1,3 and 5 and Wave 3 is often the most extensive.

Following each impulse wave is a corrective one. Corrective waves, on the other hand, stick to a 3-wave pattern. Contrary to impulse waves, corrective waves are designated alphabetic letters A, B and C used to track their movement.

Fundamentals surrounding the Elliott wave pattern

Here are a couple of things to keep in mind regarding Elliott waves:

1. Wave 4 never enters the price territory occupied by Wave 1
2. Wave 3 is never the shortest impulse wave
3. Wave 2 can ever exceed the starting point of Wave 1

Applying The Elliott Wave Theory While Trading Forex

If you are in the FX market, Elliot waves are a valuable resource used to provide you with a general idea of what the future will look like.

Traders, therefore, need to identify these waves on a trading chart. Afterwards, you should label the waves to find out whether they conform to the general Elliot wave pattern.

Knowing which particular wave is underway in the market as well as those that have gone by is essential to your trading forecast. Here are some approaches you can use hen setting your market entry, stop-loss and market exits.

·         Approach 1

If you are set to commence your wave count, watch for the price that has bottomed and is gearing to rise. Label this as Wave 1 and the subsequent retracement as wave 2.

Once you have those two waves categorized, revisit the fundamentals of Elliot Waves discussed above. Check that Wave 2 never exceeds the starting point of Wave 1.

This rule is quite essential when trading using Elliot Waves as you could also use it to identify the stop-loss level. Ideally, you would want to place it just below the lowest point from which Wave 1 began its upward trajectory. As such, once the price makes a 100% retracement, then your wave count is flawed.

Additionally, you will need to use a Fibonacci tool as Wave 2 and Wave 4 often bounce of Fibonacci retracement levels.

The Fibonacci tool should tell you whether the wave will emerge to form Wave 3 or not and therefore inform your decision to enter the market.

·         Approach 2

The second approach considers corrective waves, whereby you will begin your wave count once you have spotted a downtrend.

You should know whether a new impulse wave is about to begin from the structure of corrective wave patterns. If they are set side-by-side and measure up equally to one another, then a flat formation is in the offing, and a new impulse wave is around the corner.

Does The Elliott Wave Theory Really Work?

When trading, there is no surefire method employed that guarantees success 100% of the time. As stated earlier, humans are an irrational bunch and because of their emotions, it is difficult to predict what will happen in the market.

For that reason, the Elliott Wave Theory should not be used as a sole trading tool. While R.N. Elliott was right to point out the cyclical nature of the market, as well as tying the same to mass psychology at the time, you will still need to combine this theory with additional indicators to guarantee your success.

So, does the theory hold any water? In a broad sense, it works because you will have a clear picture of how the market behaved previously. This should give you a pretty good idea of where it is headed.

However, because market trends exhibit a fractal nature doesn’t necessarily mean that the pattern will hold out in the future. Trees and other natural organisms are widely regarded as fractals but you cannot entirely know their growth trajectory.

The same applies to the market. You will only be sure of a pattern once it is complete. But while trading, waiting for the pattern to pan out means wasting precious time during which you would have capitalized by buying a lower-value asset to sell as the price goes up.

Traders, therefore, employ a host of other indicators to counter this shortcoming. The Elliott wave pairs up perfectly with RSI and MACD indicators. You can use these combinations to spot entry and exit points.

The Takeaway

Despite its simplistic appearance, the Elliott wave theory, like other technical analysis tools, is quite complicated. However, there are some tips that you can incorporate into your trading strategy which will guarantee you a degree of success while trading.

R.N. Elliott advanced the notion of how markets repeatedly cycle over time. In a broad sense, information on previous market behavior allows traders to get a general idea of what to expect in the future.

Moreover, market oscillations are often divided into two parts – impulse and corrective waves. As you trade, remember that impulse waves routinely move far more significantly than corrective waves. So if you want to make significant gains, then following the direction of impulse waves is an excellent place to start.

On the other hand, watch out for corrective waves if you want to enter the market. Also, impulse and corrective waves signal the strength of a trend and whether it will hold out or not.

Traditionally, impulse waves make the most significant moves. So when it is diminished, in relation to corrective waves, know that the trend is about to reverse. However, a downtrend often leads to an uptrend that is a similar magnitude. Therefore, you would want to hold out a little longer to enter the market on the next corrective wave.

If you want to make any decent income from the global markets, then price action trading is one of the go-to methods to achieve this.

Simply put, you need to understand price fluctuations thoroughly to be able to identify which assets are likely to appreciate or depreciate, and through the process, generate some decent revenues.

Price action cuts across the trading sphere, whereby it incorporates a host of other trading tools to yield success. Therefore, these instruments are a vital aspect of any price action trading strategy.

So strap in and get ready for an eye-opening lesson into price action trading. This article will consider the basics of exploiting the ever-changing cost of trading instruments. Further on, you should get a definitive answer as to whether price action trading is worth the trouble.

Understanding Price action

Price action, in its primary sense, describes the frequent change in the value of trading assets. This technique tells traders the story behind how prices vary over time in a market.

You need to understand how markets behave for you want to earn something from the market. For instance, significant price drops favor buying simply because everything has become cheaper.

Before engaging in a trade, market players are often involved in a host of various analyses more so concerning price changes in the recent past. These figures give a good indication of where the market is headed.

The price action adds to the information traders already have on the markets may either further their beliefs about a particular trading decision or dismiss them.

Price action is King simply because trading revolves around price changes. Profits are generally realized from the difference in the highest and lowest price hence its significance in any trading endeavor.

One of the simplest ways of analyzing trading charts is by looking at the price curve, or simply, price action. You don’t need any fancy indicators or tools to tell you that a curve is declining. Nevertheless, additional tools like support and resistance, candlesticks, trendlines, and basic patterns, help to magnify the prevailing trend.

Now since price action works across different markets, it can be used in trading securities, bonds, FX, commodities, etc.

Price Action And Trading Charts

Price action is visible on any trading chart. The line that runs across your screen is the price of an asset, and its oscillations stem from its varying market value.

A lot of the charting techniques in use today were developed a long time ago. Traders developed the classical head and shoulders pattern from which you can draw a profit. Furthermore, additional technical analysis trends also took root such as ascending and descending triangles and the rising and falling wedges.

Back then, however, the lack of computers and computer programs forced traders to do all the drawing by hand. It wasn’t easy, and this made trading less appealing to newbies.

Today, a lot has changed, especially in the tech scene. Computers are mainstream tools used in virtually every major global sector. In trading, the use of computers has fundamentally changed how we trade.

The 21^st-century trader doesn’t need to worry about doing anything by hand since financial markets today are dominated by Artificial Intelligence. The machines account for nearly half of all market trades and during high volatility sessions, this figure rises to 90%. This should give you a better picture of how much human ingenuity has contributed to global markets.

The result of this evolution is that price action trading is a lot easier today than it was several decades ago. Tiding algorithms are all the rage today, and these critical assets help translate price action into trading signals which you can incorporate in your decision-making process.

The Basics Of Trading Price Action – Technical Analysis

Price action is visible on any trading chart, but you need more than just a pair of eyes to know what the market is undergoing. For starters, technical analysis is a crucial facet of trading on price action. Therefore, the first step to grasping price action trading is understanding technical analysis.

There is no escaping technical analysis and more so if you trade short-term timeframes. On the other hand, fundamental analysis usually involves studying the news releases and is a favorite of traders who are out to make money in long=term timeframes.

A technical analysis revolves around asset prices and price charts. Such a study aims to determine the direction of flow for the price. After doing so, traders should be able to decide their next move.

Technical analysis follows a pair of rules, one of which is the price we are viewing on a chart has already accounted for the fundamental data available. This way, we therefore do not need to consider vital information.

Also, technical analysis maintains that price follows a trend that is driven by momentum.  Momentum holds the prevailing trend as it heads in a specific direction until a far greater force emerges from the other end.

Technical Analysis Tools

To succeed in technical analysis, we need to be armed with a set of tools that make it easier to interpret what is on the price chart. Without them, the price lines would simply be so, just lines running across a blank screen.

Trendlines

These are lines drawn on a price chart to connect a series of prices. They are used to indicate a prevailing trend or a range of price movements which a trader can easily pick out as they study the price chart.

Trendlines link the lowest point on a downward moving price to the highest end of the ascending price line. As the cost of an asset trend upwards, the trend line also rises. Drawing trendlines on individual swing highs enables traders to get a better picture of the prevailing market pattern. Such as its angle of ascent. This way, you can decipher critical factors like the strength of the price move and ultimately the trend.

Price bands

Price bands are, in a general sense, the boundaries that surround any market. Trading usually doesn’t happen outside these borders and with good reason. A seller will typically indicate the upper and lower cost. In between, buyers can place their orders through the price range.

The upper and lower limits guide buyers when buying an asset. The use of price bands is quite widespread in IPOs as a company decides to issue its shares to the public.

Price bands act as controls to trading whereby, the ability to trade is restricted while outside the price bands. They are set to control buying and selling of shares and other assets en masse.

Support and resistance

Support and resistance are, without a doubt, key to the success of technical analysis. They are levels on a chart where the price rarely crosses. These levels often tend to act as barriers to the movement of price.

At the support level, the prevailing downtrend slows down and eventually grinds to a halt. Usually, a drop in the price of an asset drives up demand for the same. This demand creates a level of support.

On the other hand, resistance forms on the rally following a surge in demand and ultimately the price of the asset. Support stems from an increase in the demand from buyers, whereas resistance occurs as sellers offload their assets.

Steps To Trading Using Price Action

Usually, the first step to price action trading involves identifying a trend. Traders rely on trends to make money. This pattern reveals where the price is headed and as such, traders can get a head start to be able to cash in later on.

When trading, the gurus often utilize several tools to recognize the prevailing market trend, find out the best entry and exit points, stop-loss placement etc. relying on a single strategy while trading is often counterproductive. Most times, the success rates lie on the lower spectrum.

1.      Identify The Current Market Situation

Simply watch the overall market environment for bearish or bullish leanings. Keep in mind the general trend as well. Identifying a pattern is a critical skill all traders possess as they can understand the market better without having to look at the figures.

2.      Identify Trading Opportunities Within The Situation

Once you have the scenario set, you can now begin your search for trading opportunities. The selection process is not uniform across the trading world. Various traders have varying opinions on the markets and this is a subjective decision despite having the same prerequisites hence the significance of trading experience in the field.

For example, a slightly receding asset price could point to a pair of scenarios. In the first, a further drop could occur following a mean reversion, or the price will move up and form a double top. Even with identical information, the final trading decision is made by the trader.

What Makes Price Action Unique?

For starters, price action focuses solely on the prevailing price of an asset. A lot of traders regularly check on the cost of an asset to determine whether to enter or exit a trade.

Price action traders, on the other hand, solely rely on the price to guide their trading. These guys are particularly interested in what’s happening on the right side of the chart; this is where the most recent data appears.

Price action trading is all about living in the present. The further you move from your analysis, the less responsive your price levels will be. The newest data is by far the most reliable, and the market responds best to it. Therefore, many traders dismiss older levels and work to construct new ones.

Shortcomings

Price action trading is sometimes a waiting game. For starters, traders need the price of an asset to manifest for them to draw any conclusion from the trade. On the other hand, if you rely on fundamental information to trade, you don’t have to wait for the market to be opened.

World events cause significant shifts in the value of stocks, currencies, commodities, amongst other traded items. Traders utilizing fundamental data need not wait for the market to open to decide on which trade to follow.

Moreover, once the price gets going, you still need to confirm the trend. Patience is a virtue, but in trading shorter timeframes, it may cause you to lose out on several trades as you wait for the perfect move.

Support and resistance levels assist when it comes to trend confirmation owing to the behavior of the price in these regions. Usually, prices fluctuate with respect to these areas. Support comes about as the value of an asset goes down while the increasing cost of purchase necessitates resistance.

However, a trending market doesn’t follow these ‘rules.’ The strong momentum drives the price way beyond the support and resistance levels. Prices rarely return to previous regions of support and resistance.

The role of market psychology in Price Action trading

Market psychology plays a crucial role in Price Action trading, as the behavior of market participants can have a significant impact on market price movements. The Price Action Indicator provides traders with a visual representation of market price movements and can help traders understand the underlying emotions and behaviors that drive market trends.

1. Fear and greed: Fear and greed are two of the most powerful emotions that drive market price movements. When market participants are driven by fear, they may sell assets, leading to a downward trend in market prices. On the other hand, when market participants are driven by greed, they may buy assets, leading to an upward trend in market prices. By understanding the role of fear and greed in market psychology, traders can make informed trading decisions.

2. Market sentiment: Market sentiment refers to the overall mood or attitude of market participants. Market sentiment can be positive or negative, and it can be influenced by a variety of factors, including economic data, political events, and public opinion. By using the Price Action Indicator to understand market sentiment, traders can make informed trading decisions based on the overall mood of the market.

3. Mass psychology: Mass psychology refers to the behavior of a large group of market participants. This can include retail traders, institutional investors, and other market participants. By using the Price Action Indicator to understand mass psychology, traders can make informed trading decisions based on the behavior of the larger market.

4. Trend followers: Trend followers are traders who follow market trends and enter trades based on the direction of the trend. By using the Price Action Indicator to identify market trends, traders can follow market trends and make informed trading decisions.

5. Contrarian traders: Contrarian traders are traders who go against the trend and enter trades in the opposite direction of the trend. By using the Price Action Indicator to identify market trends, traders can make informed decisions about when to enter trades as a contrarian trader.

Market psychology plays a crucial role in Price Action trading, as the behavior of market participants can have a significant impact on market price movements. By using the Price Action Indicator to understand market psychology, traders can make informed trading decisions based on the underlying emotions and behaviors that drive market trends. This knowledge can help traders improve their trading results and increase their chances of success.

The Bottom-Line: Does It Work?

Let’s start by saying that all trading strategies rarely work 100%. Following the price action of an asset can guarantee successful trades. However, it is mostly suited to short-term investments.

Traders often argue that the market doesn’t follow a pre-determined pattern along its course. Its randomized nature makes prediction difficult – but not impossible.

Traders use an asset’s recent price history to pick out possible trading opportunities. Additionally, coupled with a raft of technical trading tools and their interpretation of all this information, traders are then able to arrive at their preferred trading decision.

Price action trading enjoys great popularity in the trading scene because it cuts across different markets. Everything subject to trading always has a price attached to it. How the items’ price action performs will then determine whether a trader will realize a profit or loss from the venture.

Additionally, price action trading is popular among beginners because it provides the perfect platform to learn the ins-and-outs of trading. Trading is hardly easy, and most newbie participants struggle to get a grasp of all the data involved.

Unlike large financial institutions who have teams of analysts working to decipher fundamental and technical data, standalone actors rely wholly on their capabilities. Herein is where technical analysis works in our favor.

Firms with significant trading positions are sometimes unable to hold them as individual participants. Technical analysis drawn from price action helps us to identify entry points into the market that were entirely missed by those relying on fundamental data.

Moreover, trading requires us to maximize our advantage to gain a better position in the market. Failure to do so will inevitably lead to lossmaking and is generally a waste of time.

While price action trading can guarantee a degree of success, you still need to combine the method with a host of technical indicators. They will add on to your conviction in the trading decision you fall upon.

One of the reasons traders favor the FX market over other assets and commodities is the high liquidity displayed by the currency market. Also, since all that traders need to access this market is an internet connection, trading FX is often a global affair.

Moreover, because of its international reach, the FX scene is greatly affected by the goings-on across the world. These global events usually follow news releases that give a bigger picture of what is happening. When you want to trade forex on news releases, get ready for an exhilarating experience.

Global events trigger volatile market conditions. Such volatility is often trailed price jumps which traders then capitalize on making a profit. The main item of interest in the FX scene is a country’s currency which is usually pegged to its economic performance.

Therefore, as news releases occur, expect shifts in the market. As a trader, you should be ready to capitalize on the changing market to make money.

This article will explain the ins and outs of news releases and what they mean to the forex trading world. Also, read on and find out how you can also capitalize on global events through news releases while trading.

News Releases Focus On Specific Currencies

A couple of currencies dominates the forex market. These commonly traded currency pairs frequently show the highest volatility. Price changes observed are numerous and traders have a lot of money-making opportunities.

Therefore, a lot of global events have an impact on the values of these major currencies. As a trader looking to exploit news releases focus on updates concerning these critical currencies. The common currencies are:

• USD
• EUR
• GBP
• JPY
• CHF
• CAD
• AUD

When it comes to pairing up these currencies, the most liquid combinations are always tied to the Dollar. Being a major global economy, it is not hard to see how any major event would have an impact on the American economy.

Nevertheless, as globalization ramps up its influence across borders, global events similarly affect different world economies. One standout scenario is the Brexit debacle. While on the surface, a lot would assume that the UK opting out of the EU would primarily affect its economy.

Economic studies indicate that the UK will fare rather poorly out of the European economic block as opposed to remaining inside it.

The country would be unable to access the free market which EU member states have access to, and hence, its citizens will not be selling their goods and services there. Also, job losses from British citizens working abroad will likely diminish owing to tighter cross-border movement restrictions.

While Brexit is mostly a British affair, its influence is felt 3000 miles away in New York. A day after the Brexit vote saw a drop in the values of both EUR and USD. On the other hand, the USD surged.

While an appreciation in the value of a currency points to a robust economy, it makes purchasing them difficult, mainly owing to their higher price. Additionally, US exports to the UK surge in price and many people would rather forego them.

News Releases And Economic Indicators

News releases are mainly triggered by significant events that influence the major economies. Therefore, a lot of releaseS are centered on the health of an economy. There are various economic indicators that can help you to tell the status of the country.

These economic indicators are what traders watch out for to get a bearing on market performance. Market performance influences trading by altering the values of different currencies and creating trading opportunities. These are some of the economic markers you need to be aware of:

·         GDP

It is the most widely used indicator of a country’s macroeconomic status. All countries across the world use GDP as a way to measure their economic strength except for the Kingdom of Bhutan. In short, any news release that touches on GDP will bring along significant changes in the market environment.

·         Consumer spending

Consumers run the economy by fueling purchases and sales alike. The purchasing power of any citizenry goes a long way in determining the economic strength of their country.

Consumer spending usually defines how much money people spend on buying goods and services. These items of interest to consumers range from durable items like appliances to short-term items such as gasoline, food, clothes etc.

Consumer spending is a good indicator of an economy’s strength. This is primarily because of how consumer spending tends to drive demand and supply of certain commodities. As disposable income increases, people’s need for goods similarly goes up and manufacturers are compelled to supply more products. Failure to do so leads to higher prices and ultimately inflation sets in.

In the US, it is the primary force behind the country’s superior economic disposition. So if you want to know how where the US economy ranks, then check out data that shows what people are buying and what they aren’t.

Following consumer spending news releases should help you identify trends in the market. This should ultimately give you plenty of information with which to you can use to make critical trading decisions

·         Inflation

Rising inflation results from a sustained increase in the general prices of commodities in an economy. As the cost of goods goes up, people’s ability to afford them drops and with it consumer spending.

As people aren’t spending money in the economy, investors tend to experience heightened uncertainty and hence a reduction in investments.

When it comes to forex trading, heightened inflation gradually causes the respective currency to depreciate in the long-term. This is because trading in such an economy holds no benefit to investors.

Moreover, economic growth slows down because of the uncertainty displayed by potential investors. On the other hand, rapid inflation may arise from fast economic growth. But if interest rates are not favorable, then economic growth hits a speed bump. So watch out for news releases that point to either a rise or drop in inflation levels.

·         Employment statistics

This data provides a pretty good picture of the employment status of a country’s population. The rate of unemployment, for instance, is a crucial factor when it comes to trading FX. A rising rate points to a diminishing currency value. On the flip side, higher employment figures point to a strong economy and a currency whose value is on the rise.

·         Industrialization

Rapid industrialization is a blessing to any economy. Workers in these countries often experience a boost in their earnings, mainly due to the availability of jobs. Therefore, they have more disposable income and are likely to invest some of that extra cash.

There is a wealth of benefits that can be drawn from a countries ability to industrialize, and as investors, it offers profitable moves.

Events That Lead To News Releases

The forex scene hardly remains inactive as millions of traders across the globe attempt to eke a profit trading currencies. As such, any major global event usually has a significant impact on the FX market. Here are some critical events whose influence can be seen all over the FX arena.

·         Elections

Elections are a common occurrence in just about every country in the world. After a set period, the citizens of a country gather to select who will lead them in the following years. Whoever wins will most likely impact future investment prospects into that country.

Political parties whose manifesto promises economic growth and development tends to attract investors and further boost the nation’s currency value. On the other hand, if the incumbent gravitates towards pro-economic policies and is on the brink of losing out, investors will generally cower from the market. Currency drops due to this insecurity about the future.

Political equations carry a lot of emotional baggage and further increase the market’s uncertainty. Also, political instability is not a rare occurrence, and these two often raise volatility levels. Whichever side you may lie on the trading divide, heightened volatility presents new opportunities to make money.

·         Wars and conflict

Physical wars are often distressing to the economy and the citizenry at large. War damages just about anything in a country. Losses may result from destroyed infrastructure like roads and bridges. Ultimately, the broader economy suffers. Loss of lives only compounds this problem.

After wars have been fought, countries must rebuild. Usually, this process if financed via low-cost credit. Inevitably, the war-ravaged nation’s currency loses value over this dependency. The cost of rebuilding will, in the end, be paid for indirectly by the country’s economic wellbeing.

On the other hand, wars have the potential to stimulate economic growth throughout the manufacturing sector. Conflict draws significant resources from the economy and if a country is capable, then they will be able to meet the cost weapons and other items needed on the battlefield.

One famous example is the US during WW2. The nation was in the midst of the Great Depression when the Axis powers landed on Pearl Harbor. After this, the American war effort was kicked into high gear, and this saw the rise of a manufacturing industry like no other which ultimately paid off in victory.

·         Natural disasters

These are often unpredictable and carry devastating effects on the economy of the affected country. Earthquakes, floods and tsunamis do not just impact the economy but also the driving force behind it.

Natural disasters have the potential to undo several years’ worth of economic development in an instant. For institutions with tangible assets like office buildings, the loss encountered is tremendous and these entities usually close shop.

Besides the damage to infrastructure, the cost of cleaning up after a natural disaster such as an earthquake is monumental. Usually, and unlike wars, natural disasters do not have a positive outcome and any economic gains are lost in a brief moment of Mother Nature’s wrath.

Trading The News

Once you have a clear picture of which events impact the economy, you then have to figure out how to apply this knowledge on the trading floor. While there is no foolproof way to trade news releases, two methods stand out from the rest: Directional and non-directional bias.

·         Directional Bias

When it comes to directional bias, you usually hold the belief that a market will follow a particular trend following a news release. You need to know what item in the news release will cause the market to shift. Prior to these releases, analysts often arrive at a consensus on how the economy is projected to behave.

Once the news is out, the actual figure and the consensus from the prior analysis have a role to play when trading.

Successful traders live by the mantra, ‘Buy the rumor and sell the news.’ This means that before news releases, these guys have already secured positions in the market and once the news is out, they then sell their position to those who waited for the news release.

Traders often have to be keen on the consensus versus actual figures reported. The harmonized assumption may give you a general direction and possibly a head start.

·         Non-directional bias

As opposes to directional bias, this approach doesn’t follow any direction until the actual news is out. For traders using this method, the preliminary course of the market following any event is insignificant. It is only until the news is out that traders begin to make moves in the market.

However, they know that once a significant event takes place, the market will similarly react with an equally substantial move.

Patience is critical since you will have to await the result to decide on the direction of your trade. This method lags behind directional bias and sometimes you may be late to the party. However, you will be confident of your move since the news is already out in the open.

Finally, trading news is not just about waiting for significant events before getting into the market. On the contrary, you need a broad understanding of how global markets work and react to significant events and calamities. This way, you will be in a position to predict the outcome of any news release.

Your mind is the most powerful asset you possess at any instance. It doesn’t matter how many trading tools and aids you have on tap, if you are unable to engage your mind in any constructive market analysis, trading won’t benefit you.

However, we humans don’t make the right decisions all the time. Most times, we are plagued by cognitive biases that impede our thought process and ultimately result in a flawed decision-making process. The result, especially when it comes to trading, is a loss of vital profits.

Cognitive biases in trading is not a new phenomenon, and traders have had to cope with this limitation for ages. Cognitive biases are a human characteristic and as long as we remain so, we won’t be able to overcome the flaw.

However, knowing the effect of these biases on our daily lives is as important as solving the problem itself. Therefore, this article will break down a couple of cognitive biases traders have to contend with daily. Moreover, this article will also show you how to remedy some of these biases and aid in successful trading.

1.      Confirmation Bias

Human beings are notorious for practicing favoritism. That is why a lot of people only listen to the opinions and sentiments of those who favor their point of view. The same occurs in trading whereby the confirmation bias compels us to agree with information that only supports our case.

This cognitive bias is harmful to your trading prospects since you are going to consider very little information before arriving at a decision. On the other hand, you need to gather extensive data to trade successfully.

Also, the bias forces our personal opinions and individualism to get in the way of profitable trading. While looking for information about the market, traders will tend to skew their search to get favorable evidence as opposed to objective data.

The global market is affected by several factors. These normally dictate the pace of trading and further affect how the market behaves. If you tailor your analysis to only consider one or two of these factors, you would be assuming the others hold no sway in the market.

This type of selective thinking is compounded when you only consider very little data. So traders need to realize that objectivity while trading is paramount. The market is an independent entity; it doesn’t care what you think to be true so keep your prejudices away from the trading floor.

Always be on the lookout for new information. The influential English economist, John Maynard Keynes, once quipped, ‘When the information changes, change your conclusion.’

2.      Anchoring Bias

Cognitive biases manifest in different ways, more so when it comes to accepting new information. Traders will often anchor their decision on the first information they received.

There is no problem with believing legitimate information. However, doing so puts too much weight on it such that you tend to block out dissenting opinions.

The market is the primary source of trading information, and traders are keen on price changes and the general trend. So when a market starts off the day with a robust bullish direction, a lot of people will likely believe this to be the trend throughout the session.

However, they fail to ignore that this was just the first signal from the market—everything else after it doesn’t matter. So if the trend reverses over the course of trading, you can guess who will lose out.

Many cognitive biases seem to inhibit traders from getting a broader picture of the market. The anchoring bias similarly makes traders fight the market because they believe what they know to be true. Stubbornness enables anchoring bias and if you want to be rid of this bias, then practice some flexibility.

Ideally, you would consider past data so that you get a bearing on what the market is doing. Also, take into account new information. You have to be in the know while trading. Therefore, lose that anchor that is leading you blindly.

3.      Gamblers Fallacy

Gambling and trading are somewhat interlinked. Sometimes trading is mistaken for gambling owing to the need to make predictions. Traders routinely carry out analysis in a bid to foretell future market behavior.

However, they are two different pursuits. Trading, on one hand, represents a measured approach to making money. Most times, gambling is often a result of one’s gut feeling and a large majority of gamblers rarely analyze their picks. If you apply this thinking to the trading scene, then get ready for monumental losses.

That said, the Gambler’s Fallacy shows a flawed analysis of probabilities. Traders, like gamblers, are inclined to believe that a previous series of events have an effect on the future and tend to influence what will happen at the time. While this is true, future events are, however, independent in their own right and not tied to what happened yesterday.

The Gambler’s Fallacy originated in Las Vegas during the early nineties. It was at this point that it gained its famous moniker, The Monte Carlo Effect, from the casino by the same name.

On a roulette wheel, the ball fell on black several times back-to-back, and from a gambler’s point of view, it would then fall on red given the numerous times it landed on black. However, it took twenty-seven turns to land red and along the way, millions of dollars of gamblers’ money went down the drain.

Another simplified example is the coin toss. If you flip a coin ten times and it always lands ‘heads’ side up, you might think that that result has occurred on too many times to repeat. So the eleventh toss will probably yield the ‘tails’ side up.

In any coin toss, the likelihood of a given outcome is 50%. This probability never changes because there are only two outcomes that can occur. So even if one hundred heads show, the next toss will have a 50-50 chance of being either heads or tails.

4.      Post-purchase Rationalization

Once you make a decision, you tend to stick with it and even go on to rationalize the same. This way, we are convincing ourselves that regardless of the outcome, it was a well-intended move.

Traders are prone to post-purchase rationalization more so when it comes to risky and otherwise costly purchases. This is witnessed after traders have done extensive technical analysis and information gathering before trading.

Before entering the market, traders need to be constantly updated on the market environment. This necessitates long hours and a wealth of trading literature. So it only follows that once you settle on a trading move, everything will make perfect sense. Very few people will admit that making a wrong move, and this is often their undoing.

A failed trade remains so, despite how much you try to rationalize it. Sometimes when traders are buried in their analyses, they might overlook minor details that will eventually hurt their trade.

Once in the market, we become so convinced in the illusion of the ‘perfect’ trade, we are inclined to ignore red flags on the way to making a loss. Trading allows participants to salvage a losing move early on. Rationalizing a losing trade blinds you to the fact that it is failing.

After committing several man-hours’ worth of technical analysis as well as consuming a wealth of literature on the market to find the perfect trade, very few will admit to an error. Many will instead resort to post-purchase rationalization and, in the end, watch their effort go down the drain.

5.      Loss-aversion

Everyone, including traders, likes to win. One of the primary reasons why people get into trading is to earn money. The prospect of turning huge profits motivates a lot of people to trade. However, on the flip side, it brings about the loss-aversion bias.

Encountering a loss is far more painful than the pleasure derived from a winning move. That is why many people are reluctant to implement risky strategies because of the potential to make a significant loss.

Therefore, traders will often focus their energies towards avoiding the loss altogether. This way, much focus is trained on the potential loss as opposed to the gains. A lot of people will ultimately opt for a smaller reward than risk the move in search of a more significant profit.

6.      Bandwagon Effect

The Bandwagon effect points to human beings’ inclination to follow what other people are doing for various reasons, some of which are flimsy at best. This is evident in pop culture trends as everyone is out to ‘fit in’ with the crowd.

The bandwagon effect causes people to cede their way of thinking for the group mentality. From the onset, it has the potential to be disastrous especially when it comes to making financial decisions, e.g. during trading.

Trading information is spread across the internet. You might land on a forum that preaches the end of a bullish market run. Soon all the websites and news portals are abuzz with this prediction. However, you need first to conduct your analysis and confirm if it all holds water.

Failure to do so means you will be walking blindly into a trade. Since you didn’t conduct any analysis, you have no idea of the outcome, save for a couple of rave reviews on the net.

Trading is not a group effort. At the end of the day, if you made a loss, it will only hurt your account. Trading losses are never shared, and neither are the profits. Trading gurus whose advice you seek is probably unaware of the outcome of your trades and most likely do not care. Remember, only the wearer knows where the shoe pinches.

7.      Recency Bias

Traders follow the prevailing market trend. The market behavior then informs a lot of trading decisions. However, trends reverse, and a lot of traders do get caught out because they had not anticipated this change.

The recency bias is seen where traders believe that the current situation will continue to hold out. This belief is drawn from how the market is behaving currently and in the recent past. So an uptrend that was prominent in the past two years will probably continue moving forward.

Recency bias is seen where traders only consider the short-term history of the market as an indication of the future. This bias is drawn from human’s propensity only to recall things that happened in the recent past.

When it comes to investing, recency bias can become your greatest undoing. The trading scene requires traders to consider a wealth of information. When the bias kicks in, you will only take into account far less data than needed.

When you choose inadequate information to inform your trading decision, you might as well trade with a blindfold because you lack the bigger picture.

Some traders who make long-term gains can, because of the recency bias, be inclined to quit because of a years’ worth of bad trades. On the other hand, others may be deceived by recent wins in the market without considering the losses that occurred at the start.

For any successful trading to take place, you need to do away with this bias. A long-term investment allows you to broaden your myopic view of the market. Think about your long-term goals as opposed to quick profits. Expand your perspective and get a proper understanding of your strengths and weaknesses.

Traders always have to keep a cool head. Do not be swayed by any significant but short-term profits as tend to obscure your initial goals. And finally, recency bias works with what you believe to be true. Set realistic expectations and work with what you can control.

8.      Illusion of Control

This cognitive bias defines what a lot of traders struggle to accept. The market is an uncontrollable behemoth, and no matter all the stops you put along the way, lossmaking can occur.

Even in life, there are quite a few things which we have total control over, like the food we take or the clothes we wear. However, in a real-world setting, our power diminishes.

For traders looking to make a living, knowing what you can and cannot control is essential to your success. As an individual, there is a limited number of things you can control, so capitalize on these first before thinking about the broader pictures.

·         Entry and exit into the market

Only enter a market you fully understand. Trading charts exist to help traders get a visual feel of the market at a time. It will be reckless to try and enter a market in which you have little knowledge. For starters, the lack of experience puts you at a disadvantage and you will only be putting your money up for grabs.

·         Take profit

Setting reasonable profit targets after conducting a thorough analysis of the market situation. Now the fear of lossmaking compels traders to deviate from these targets and, in the end, make smaller returns.

·         Stop loss

All traders need to be reasonable, more so when it comes to how their trading moves are running. The stop loss allows you to close the trade before additional losses pour in. Stop-loss orders are vital if you want to take out the pain of a failing trade. At the end of the day, it is way better to have your capital intact and live to trade another day.

·         Mindset

Your trading psychology matters greatly when it comes to realizing success in this field. It is, without a doubt, harder to master cognitive biases. We then have to indulge in proper training and commitment. These go a long way in helping traders achieve the ultimate trading mindset.

Trading boils down to the analytics, and your emotions simply have no voice over your trading decisions. It is a well-known fact of how markets are often affected by major world events.

However, trading with scientific data on hand will give you a better view of the whole market over a more extended period, allowing for a better understanding. Take time to master your trading psych and learn to resist your emotions while trading.

9.      Attribution Bias

The attribution bias points to how we tend to excuse our behavior or that which is exhibited by others without paying attention to reality. This bias is evident when we attempt to absolve ourselves from any wrongdoing to soothe our egos.

Typically, we often take credit for our successes and in case of a loss, it ever is our fault. When traders lose out on a trade, they blame just about everything else but themselves. However, your broker or even the president didn’t decide to enter or exit the market., that was squarely your move.

Confidence is a vital character to have and works wonders in just about all significant aspects of our lives from school to the workplace. So why does this crucial aspect of human nature spiral out of hand and cause us to deny any wrongdoing?

Regardless of the answer, traders need to take control of their actions and accept responsibility for any eventuality. So whether you make a profit or a loss, own it as you learn. After that, find out what went wrong and work towards improving your trading.

10. Hindsight Bias

Trading with hindsight knowledge can make you extremely rich. This is because you are probably aware of the outcome even before it happens. But every trader knows this to be an impossibility. No one actually knows what will happen in the future. All traders can do is analyze previous data to get a bearing of what the future holds.

Hindsight bias is the assumption that following an outcome, you hold the belief that you were aware of what would take place. Since you knew what was about to happen before it did, you then believe that you are capable of telling the future based on this off-chance.

Traders often attempt to enter or exit a trade at the perfect moment to capitalize on the value of an asset at the time. If you don’t time your move appropriately, then you will hold the thought that you saw the move, but you only were late to the party.

Such misguided beliefs take away the thought of an improper analysis, which could have brought about a failed trade. Your confidence in your supposed ‘ability to foretell the future’ grows and impacts your decision making process.

Investors ought to be keen on how they arrive at decisions. The future is uncharted territory, and relying on your gut feeling will only get you so far. Careful analysis, on the other hand, will help you overcome hindsight bias. Also, keep a record of your trading activities marking your wins versus the losses. This should tell you if you really saw it coming.

11. Neglect of Probability

Probability plays a massive role in global markets. Trading often takes place after one has evaluated all possible outcomes and settled on one with the highest likelihood of success. However, humans often tend to miscalculate when it comes to making decisions.

Neglect of probability is observable as traders violate decision making when they aren’t sure of how future events will pan out. Traders either have to compensate for the risk of a low-probability event or forego it altogether.

The outcome of any trade is not set in stone, and several results can be expected. Commonly, what a trader believes to be the best possible outcome is usually their best probability concerning the trade.

Other possible outcomes vary depending on the thought process used. Traders will ultimately have to take into account as many possible outcomes as possible to avoid being blindsided while entering the market.

Objectivity while trading is vital and can guarantee you immense success. However, as humans, we have to get past several cognitive biases to be able to trade objectively. It is quite easy to be overconfident, for example, and ignore warning signs. Ultimately, you will be trading at a loss. Therefore, traders need to understand their cognitive biases at work. This way, they can curtail it and work towards their intended goal.

Many traders across the globe take advantage of the head and shoulders pattern to help them predict future market behavior. The ultimate goal of any trading endeavor is to be ahead of the game. When you know how the price will behave in the future, you will be able to invest your money wisely in a profit-generating move.

The head and shoulders pattern is often seen on trading charts exhibiting three peaks. In its primary sense, this pattern indicates trend reversals and further helps to give critical trading signals. Because they are widely used, budding traders are required to have a good grasp of what the pattern indicates.

The head and shoulders pattern is a valuable trading tool, and this article will break down various aspects surrounding it. Afterward, you will have a thorough understanding of the pattern, when to implement it and ultimately be able to trade using the head and shoulders pattern successfully.

What is the head and shoulders pattern?

This pattern is represented by three peaks appearing on a baseline along the price line. The middle section is usually the most prominent as the lesser pair located on either side of it. The center peak is called the head. It is flanked on either side by the right and left shoulder.

The baseline from which the head and shoulders pattern arises follows an asset’s price. This value will rise to the first peak, decline and rise once more to a second peak. The second peak is positioned above the initial one forming a ‘nose.’

After hitting its highest summit, the price will then decline to the original base point from which it will climb up for the final time. This time, it will only reach the initial height before receding to the base.

Inverse head and shoulders pattern

An inverted head and shoulders pattern is known as a head and shoulders bottom. The shape of this pattern is the opposite of the regular head and shoulders configuration.

As such, the price initially dips to a trough, then rises before declining past the initial trough. Once again, it will emerge from this low-point and rise again. Afterward, it will fall and form the last trough. Once this is done, the price leaps upwards.

Features Of A Head And Shoulders Pattern

The head and shoulders pattern is a distinct shape that forms on a trading chart. There are several key features that such models display, and these are critical to interpreting the trading signal that follows.

Left shoulder

It is the first peak that forms as the price line fluctuates between subsequent bottoms and peaks. By definition, the left shoulder is situated on the left side of the central summit, the head. The left shoulder comes about after the rise in price terminates in a peak before falling.

Head

After the price falls from the first peak, it rises anew to the highest level yet. This new peak is the head and towers above adjacent summits.

Right shoulder

This is the last peak formed from a declining price movement that eventually rises but doesn’t reach the height seen on the middle peak. This diminished summit is the right shoulder.

Neckline

The neckline is a crucial line on the head and shoulders pattern which traders use to inform their next trading move. It is often gotten once you have identified the other three critical features of this pattern, the head, left shoulder, and right shoulder. The neckline then comes about from the left shoulder and head of the head and shoulders pattern.

So first, find out the lowest points of the price line as it drops from both the left shoulder and the central head. The connection between these two points now forms the neckline. It is typically marked by a horizontal line cutting across the price line.

The neckline is crucial to trading this pattern. For instance, no trading should take place until the complete head and shoulders pattern manifests. So once the trend goes past the neckline, then it is all systems go.

Identify The Head And Shoulders Pattern On A Trading Chart

The head and shoulders pattern is a pretty straightforward illustration on a trading chart. Here is an example with a neckline crossing its length.

Trading The Head And Shoulders Pattern

Since traders often use this pattern to make trading decisions here are a couple of essential items you should know before you get started:

The ultimate destination for any uptrend is a reversal. So, as a rule of thumb, an extended uptrend will eventually lead to a significant reversal. The right shoulder, the final piece of the puzzle, signals an impending reversal in the market. Once this segment begins to form, you can start plotting the neckline.

The head and shoulders pattern shows how buyers are behaving in the market. In this case, a diminished shoulder signals a trend that is losing momentum. So as a trader, it is best to prepare for a potential reversal in the market.

Moreover, you need a neckline in place to actually confirm a trend reversal. Once the price crosses your neckline, then the head and shoulders pattern is complete. A lot of traders only use the right shoulder to confirm this pattern.

However, the right shoulder is just a single facet that tells you a reversal is in the offing – it hasn’t occurred just yet. A trend technically breaks once a peak that is lower than the prevailing highs forms. Hence the reason many traders mistake the right shoulder for an indication that the pattern is complete.

Distinguishing an already formed pattern from one that is still in the works is the first step to trading using the tool.

Let us now consider your market moves following the head and shoulders pattern. Different traders use a pair of distinct trading strategies. In the first method, you don’t have to wait for the market to close below the neckline. On the other hand, you can play it safe by waiting out the market until it closes below the neckline.

Method #1

This is the riskier of the two entry methods you can use to trade a head and shoulders pattern.  With this, you are going to wait for the price curve to cross your neckline. This way, you will be able to test out the neckline as a resistance point.

By testing the neckline, you can ascertain whether the uptrend has run its course and a reversal is in the works. A neckline that doesn’t hold points to a sustained uptrend and the head and shoulders pattern anticipated hasn’t formed.

Remember, always wait for the pattern to manifest before trading. The neckline should give you a clear indication of this.

While this method guarantees a much higher success rate, you can wait for a move that won’t happen. Since you are waiting on the neckline to manifest as resistance, once the pullback ceases and the breakout resumes, you will have missed a trading opportunity.

Method #2

If you can stomach a little risk, then consider the second method. First of all, wait for the candle to close below the support then sell. There isn’t much to this method, but the risk of the scenario being a false break. False breaks are frequent when trading high-frequency timeframes such as on an intraday basis.

Placing stops

Risk management determines, to a great extent, whether a trade will be successful or not. Even if a move looks promising, you need to watch your profits, and in case things don’t go your way, your earnings are still safe. So it is essential to mark out your stop-loss placement.

Usually, traders place their stops at two common points. The top of the right shoulder is preferred over using the pattern’s head as a stop.

Additionally, you can place your stop after the right shoulder. Ideally, it should lie just above the last summit following the right shoulder.

Setting profit targets

Your profit target from the head and shoulders pattern is obtained from the difference between the head and lowest point of either shoulder. Once you get this figure, subtract it from the neckline breakout so that you get the target on the lower end.

If you have an inverted pattern, the difference gotten from the head and shoulder lows is added to the neckline break so that you get a target on the higher level.

Significance Of Head And Shoulders Pattern

The head and shoulders pattern, like many other trading tools, isn’t entirely foolproof. However, in theory, this pattern should tell you when to enter or exit a market with some degree of conviction.

Falling prices indicate a favorable buying environment, and buyers are slowly getting into the market. Once you get to the neckline, those who bought on the rally in the right shoulder have their expectations quashed and are facing a loss-making scenario. They will inevitably exit the market, further driving the price toward your profit target.

Additional guidelines for trading the head and shoulders pattern

Make sure the pattern forms after a prolonged uptrend. Make sure that there are no swing highs after the potential left shoulder.

The shoulders should lie below the head’s maximum point. Following this structure, you should be able to make out the head and shoulders pattern from afar quickly.

The neckline is a critical aspect of this pattern. Therefore, make sure it is always horizontal or moving up. Stay away from a pattern with a descending neckline because a falling neckline signals a weak reversal pattern. You can still make something from the situation, but the risks involved don’t warrant the move.

Timeframes matter when it comes to trading. In the case of this pattern, shorter timeframes yield much better results, such as daily and weekly intervals.  If you go lower than this, your pattern will exhibit many false positives.

Limitations of this pattern

• Trading this strategy requires that you wait for the pattern to manifest itself fully. If you aren’t patient, this trading method will fail. Additionally, if you trade on a partially formed head and shoulders pattern, you run a higher risk of making losses as oppose to waiting out the trend.

For novice traders, this pattern requires a bit of practice to be able to spot on a price line.

• Fundamental information plays a crucial role in your decision to enter or exit a market. This way, any sudden event may force the price to drop further than anticipated. Eventually, you will be unable to hit your price targets following this significant drop.
• Price action plays a vital role when interpreting the head and shoulders pattern. As such, newbie traders might find it challenging to read a price action that is retesting the neckline. This scenario could also lead to missed trades once you decide to wait out the trend.
• Also, the head and shoulders pattern can be subject to individual interpretation. Different traders will view them differently depending on the trading style in use. It is prudent to have a clear definition of what an ideal pattern ought to appear before pinpointing one.

Final Thoughts

The head and shoulders pattern is frequently used by traders to generate decent profits. While this pattern may seem like a straightforward tool, there is a considerable amount of analysis that has to be done so that you can yield successful trades.

To interpret the head and shoulders pattern, you have to first figure out what is going on behind the scenes. Consider the buyers and sellers who are causing the price to shift. Also, check out the prevailing market environment as well to get a better understanding of the forces that determine the cost of assets.

While it is not a surefire means to achieving trading success, following the laid out guidelines will guarantee you a degree of profits from your trades.  Since this method analyses the technical aspect of trading, you also ought to deliberate the fundamental side of things to get a clearer picture of the prevailing market condition.