How to Trade Head and Shoulders Patterns | Trading Playbook

This is the Trading Playbook where the charts do the talking and every session makes you a better trader. Hello everyone, Lawton here with the Verified Investing back with another Trading Playbook. Happy Saturday everybody. Hope you guys are doing well. Welcome to another episode. Before I go any further, guys, please please see in the banner down below, please like this video, comments, let me know what you think, and please consider subscribing to the Verified Investing YouTube channel. Does a couple things. Uh first of all, it helps us know that you want to see more content just like this. Second of all, it's a way to easily support us and continue allow us to continue providing so much high-quality free content for all of you. And it also helps the algorithms know that hey, you want to see more content just like this. In today's video, the play is the head and shoulders pattern. So, let's hop right into it, shall we? With the head and shoulders pattern. So, when you're thinking about a head and shoulders, and I'll go back to myself in a second, what do you think? Well, you think of a shoulder, a nice head, and a shoulder, right? Almost like a like an M. But, these, you know, just having the pattern isn't uh doesn't mean it's necessarily valid. As you can see right here, I've gone ahead and drawn this. You could say, "Oh, there's a shoulder here, a head, and then a shoulder, the head and shoulders pattern, right? Is this valid?" Well, no, there's two a few key rules that you need to follow for any head and shoulders pattern. And I'm going to write them down for you on your screen. Rule number one. The head and shoulders needs to have an up sloping trend line. So, if you remember last week's episode, what did we say? We said up sloping like the break of an up sloping trend line, that is bearish, right? Up sloping equals bearish. When it breaks, that's bearish. Right? So, the first thing you need is an up sloping trend line. So, is this valid? No, because the neckline is actually down sloping. Right? So, no, the down sloping trend line would not uh work. Number two, I'll put another rule for you. The second rule is the head has to be the highest. Head has to be the highest. And to demonstrate that, I'm going to use my favorite metaphor and go back to my camera. So, look at me. Um going to try and do a good posture here like my grandma would have wanted. So, sitting with my chest straight up, how do you see my shoulders? We see my shoulder, my head, and then my other shoulder. Right? And this is head shoulder shoulder head shoulder. But, when I say head has to be the highest, the head has to be the very top. Cuz no matter how hard I try to move my shoulder above, it's not going above my head. Right? It doesn't matter which side I use, right? The The shoulders aren't going above my head normally. Right? There are of course exceptions, but for the sake of this pattern, the shoulders can never be higher than the head. So, that brings us to rule two. The head has to be the highest point, like this is. So, this is not valid cuz it's down sloping trend line, but the head is the highest point. Right? And one more rule, and is the inverse is an inverse. So, there's a regular head and shoulders pattern. Shoulder, head, shoulder, right? Nice up sloping trend line here, but there's also an inverse head and shoulders. And what does that look like? Well, it looks something like this. Right? And notice, when I say inverse is inverse, it is literally inverse. So, this rule, right? One, you'll inverse that rule. Right? For it for uh inverse head and shoulders, you need a down sloping trend line instead of an up sloping trend line or neck line, in this case. Second of all, we were inversing the second rule. The head has to be the highest. In this case, the head needs to be the lowest. The absolute lowest. And then a rule three, a rule four, rather, rule four in this is measured move taken from distance between head and neck line. The last rule, and it's a bit longer of a rule, and let's see if I can't make this a little smaller. So, the the the final rule is that the A move is taken from the distance between the head and the neckline. So, say we have you know, the neckline is something like this. Well, the measured move would be a move would be here. Right? You want to take the break of it and take that measured move all the way down to the bottom, right from the break. This is the same distance between the head and the neckline. Same thing for the inverse head and shoulders in this case. Right? Let's say we're we have a trend line like this, a neckline like this, and you want to find the measured move of this, we take that distance and you continue and put it to the break of that inverse head and shoulders pattern. All right. So, now let's learn how to read the tape with a couple of examples. So, remembering these key rules, we'll just take it over here to uh to Bitcoin. See if I can. Where did it go? Can I copy this? Please take this. Okay, yeah. I'm going to leave that up there so you guys can reference back to it. This is a valid head and shoulders pattern, right? Head and shoulders pattern because and there's a tool for this in TradingView that makes it really easy. You can go like this, draw the left shoulder there, bring it to the head, on the neckline, and the right shoulder is somewhere like this. And you can see it clearly labeled. Left shoulder, head, right shoulder, right? And in order to, you know, to to trade this, you're looking for a break of the neckline. Now, let's go back to the rules. How do we know the measured move of this pattern? What is the measured move of this pattern? Well, to do that, you got to take the distance from the head all the way down to the neckline, and then move it all the way over to that break. So, in this case, the measured move would be a move down to around $57,500 for that measured move of the head and shoulders pattern. Right? We'll move on to another one. On silver here, and silver's getting quite beat up. Right? Are you Do you guys see it? Do you see any head and shoulders pattern? I'll pause for a second and let you guys take a look and try and figure out where it's at. So, we're just going to remember these rules again, and I'm going to go ahead and draw a head and shoulders pattern. The first thing I'm looking for is the armpits. Armpits make or break the pattern. So, look at this. It's still technically valid, right? Even though the shoulders look kind of funny, doesn't matter. Still valid. It's like family, right? You have cousins or that are a little strange, look a little funny, talk a little funny, from a different area, right? But, still family. In the same way, the head and shoulders the shoulders might look a little funny, but it's still valid for a head and shoulders pattern. And this is on silver, right? Which absolutely took a tumble. So, let's go ahead and take the measured move of this, and boom, take a look at that. Measured move down to around $54. Basically, similar to where it's at now. But, you saw how I did that, right? This is the left shoulder, this is the head, and this is the right shoulder. Right? Continuing to remember these rules. we're going to do a couple more here just so you really get the hang of it. Again, with these rules in mind, go ahead and pause it and uh see if you can't draw the head and shoulders pattern on your own charts. Now, this is kind of a trick question. Right? But, let's see. So, what if I told you there were two head and shoulders patterns on this chart? Let's go ahead and draw the first one here. Right? Even though this shoulder is Oh, I didn't mean to do that. Even though this shoulder is small and this is kind of large, doesn't matter. The only thing that matters is what? Up sloping neckline, head has to be the highest, and the measured move is taken from the distance from the top to the bottom. Head and the neckline. And we can we can clearly kind of see this playing out here. Like this, this, this. Let's go like this. Now, let's find that measured move of this exact pattern. Well, the measured move of this from the break of the neckline would be a move down here to around 180, say. But, what if I told you, right, that there's another head and shoulders pattern hidden in the same exact chart? Well, again, first thing I do, look for the armpits. Look for the armpit. One armpit, two armpits right here. Boom. And look at that. We have a secondary head and shoulders pattern with a different set of measured moves. Again, funny looking shoulder, doesn't matter. Still absolutely valid. Let's see here. Go like this. And that you can see that this measured move is quite a bit lower. Would be a move down basically to 160, right? So, really, really interesting pattern. Last one I want to talk about is remembering these rules, taking a look at the inverse. So, I've gone ahead and drawn the inverse for you, but can you clearly see it? Can you clearly see it? It's going to be this. Boom. Inverse head and shoulder shoulder head shoulder, right? And if we want to get that neckline perfect, let's go ahead and find that measured move. Right, this is a bullish pattern because it's inverse, so we're looking at down something trend lines is a move 10% to the upside. All right? Now, let's talk a little bit about the edge that you have when trading this. Meaning, where do you get into this? How do you actually use it? Well, similar to a trend line, you can get in a one of two different places. You can get in either on the break, right? On the break of the neckline or potentially, say it comes down, on a retrace to the neckline and you look to reenter that on a trend line. Basically, at the end of the day, it's just a trend line with a head and shoulder pattern above it, right? The neckline is just a trend line. But, on a break or a retrace, those are the two areas you really want to target on getting into a head and shoulders pattern. And these are some of my favorite patterns because you have an exact measured move. Now, I'm going to go over a quick common playbook mistake and then we'll look to close it there. Common playbook mistake is that hey, you know, it hasn't Let's say that Bitcoin, you know, after breaking this and coming down, you know, 6 and 1/2% when the measured move is down 9%, decided hey, we're going to go all the way back up here, right? Is it going to still be valid? Well, the answer is no, right? For me, if the head and shoulders pattern is how Excuse me, head and shoulders pattern fulfills at least 50% of that measured move, I consider it done. And one more thing to note, guys, let's say it didn't quite break this, right? Let's see. A GIS. Let's say it didn't quite break this and we come back in and we do something like this, just remember that as soon as the shoulder goes above or below the the head, right? Depending if you're looking at an inverse or regular head and shoulders pattern, that will absolutely invalidate that pattern. Now, let's move on to tomorrow's play call. Tomorrow, I'm going to give you three setups that I'm seeing in the charts right now for potential head and shoulders pattern that I expect to play out in the next week or so. We'll go back and look at some charts. I'll go over the rules again just as a quick reminder and we will get straight into those trade setups. So, don't forget to tune in to tomorrow's episode. With that being said, guys, that's all I have for you today. Again, my name is Lawton Ho here with Verified Investing. Don't forget to like this video, subscribe, comment, tell me what you want me to cover next, what you like, what you don't like. Have a wonderful rest of your Saturday and I'll see you next time on the Trading Playbook. Bye, guys. That's the Trading Playbook. Today's episode was your film study, the principle, the pattern, the framework. The application is waiting for you on Sunday. Real setups, real levels, ready before Monday opens. Subscribe to Verified Investing on YouTube. Saturday teaches, Sunday prepares, show up ready.